Why are altcoins outperforming Bitcoin and Ethereum recently?

If you look closely at last week’s liquidation-driven market crash, you’ll notice a peculiar trend. As BTC and ETH continue to hit new long-term lows, at some point altcoins decide not to follow them, and some even rebound on significant volume.

Some altcoins didn’t even reach new lows, with the first CPI crash in May being their bottom, which happened on several illiquid tokens with low daily volumes. An example is ENS (Ethereum Name Service) below.

This is worth noting because BTC and ETH are widely considered to be "safe" assets. Strangely, this has not been the case recently. This makes me question whether it is not cryptocurrencies as a whole that are overvalued, but only BTC and ETH. Or is it the spring of altcoins that is coming?

After the market calmed down, the subsequent rally was equally bizarre. We saw tokens like $SNX (Synthetix) double in a few days, while tokens like $APE and $GMT led the rally. In the Tier 1 group, Solana led the rally. While these tokens were rising, ETH was still pitifully stuck below $1,000.

Here are some theories as to why this happens.

Tired Sellers

When the market trend reverses, people tend to sell altcoins first and move into stablecoins or other safe assets. However, even though we have been experiencing a multi-month drawdown since the beginning of the year, it turns out that the pain is not over. There was another significant crash in early May. It is safe to say that at this point, many altcoin holders have capitulated.

When the market crashed again in June, this time the worst, altcoin sellers had little room to sell. You can assume that for altcoins, the remaining holders are either treasuries/foundations, big whales, locked-in VCs, and stubborn small retailers who refuse to let go no matter what. This is a perfect situation for a bottom to form.

No leverage intervention

The death spiral of liquidations caught the industry off guard. Until last week, even some insiders had no idea how Three Arrows Capital had spiraled into bankruptcy. It was painfully revealed that the collapse of Ethereum and Bitcoin was due to unsecured loans and over-leveraging.

The biggest reason for the recent collapse of the cryptocurrency market was undoubtedly a group of people who had what we call insolvent counterparty risk. First it was Celcius, then Three Arrows Capital.

At this point, BTC and ETH are still plagued by liquidation risk. Calculating a price bottom is very difficult because it requires all parties to reveal how much capital they have to withstand any drawdown. With the liquidation of Three Arrows Capital, no one can be sure anymore that your hedge fund friend is not hiding the impending bankruptcy or some other irrelevant factor when telling you that everything is fine.

Altcoins are not shrouded in the same gloom. The risks of liquidation and over-leverage are almost non-existent on altcoins. This is a blessing in disguise, as there is nowhere else for them to go now but up. The risk has been greatly reduced. As long as the project remains solid and well-funded, the remaining key holders don’t need to sell anymore (and they can’t, as the tokens become even more illiquid). Perhaps the most important threat is VC unlocking. But by today’s standards, this is still a more predictable risk than ETH and BTC.

Reach its reasonable value

Has the bottom of altcoins come? It’s hard to predict, but their valuations are becoming reasonable.

The characteristics of these projects are: revenue is higher than their market value; the treasury is larger than their market value (such as Olympus); they can always maintain TVL, and if the market value is far below TVL, rewards will be given.

Combine the criteria of sound fundamentals with low market cap/low volume and you can see something like what $SNX has been showing over the past few days. When altcoins recover, the price rises tend to be just as dramatic as the falls. This is known to be one of the "joys" of investing in altcoins.

The shift from applications to protocols is underway

Maybe what we are seeing now is the manifestation of one of the three big cryptocurrency arguments I wrote some time ago. Until this cycle, value has mostly been concentrated in large-volume protocols, the base layer, such as Bitcoin and the first-layer platforms. The base layer is more valuable than the application. This is like in traditional technology, valuing TCP/IP higher than Google and Facebook.

Not only does this make no sense, but the high value is a hindrance to mainstream adoption. ETH, which people use to pay for GAS, shouldn't be as expensive as it is now. As you know, this is the problem with cryptocurrencies right now.

It’s time to put more value into dapps, which are like companies and services in TradTech. They are the ones solving real-world problems, interacting directly with users, and for middleware, which is like the glue that makes the entire decentralized space truly utilized.

Is the spring of altcoins coming? We can hope for it. But what is certain is that with the collapse of Terra or the attempt of the lending platform Solend to take over the whale's account, there is a phenomenon that people are now more inclined to invest in some safe protocols. These protocols can withstand market declines well, have a solid team with good management, can withstand the test of extreme volatility and liquidation pressure, have positive cash flow, etc.

This is a positive and healthy trend for the entire space, and it doesn’t matter to me whether people invest in a base layer project or a user-facing dapp. What I want to see is that value is no longer concentrated in so-called “blue chips”. Unlike traditional finance, crypto blue chips are just as volatile assets as non-blue chips. Promoting BTC or ETH as a safe thing is already misleading to a certain extent. In fact, holding BTC or ETH in the past two weeks has been a more terrible existence than holding altcoins.