Alts Discover It Robust to Beat Layer 1 King Ethereum


With the Federal Reserve appearing to be poised to take a more restrictive stance on monetary policy (for now … maybe), especially given the recent high inflation data, cryptocurrency investors seem to be rethinking how they distribute their money in the sector.

One would expect this to mean good news not only for the price of Ether, the native token of the Ethereum network, but also for its Layer 1 alternatives. In lieu of a gold-like store of value (a key value proposition for Bitcoin), Ether and its competitors represent bets on elaborate platforms for building smart contracts, non-fungible tokens (NFTs), decentralized financial applications (DeFi), and other wizardry.

“That’s why you can see that Ethereum really outperforms Bitcoin,” said Mike Novogratz, CEO of Galaxy Investment Partners, in CNBC’s “Squawk Box” on Wednesday. “If you look at the Ethereum price, Ethereum is still trading as bullishly as possible. People see Ethereum as a technology bet and Bitcoin as the devaluation of the fiat currency bet. “

So, as the narrative of the Fed’s seemingly endless printing of money cools, investors optimistic about blockchain technology might try to buy more assets than Bitcoin.

The most established of these is Ether, of course, but as Ethereum’s transaction costs become prohibitive with the boom in NFTs, it wouldn’t be a surprise if the market were to look for other networks that don’t break the bank with every transaction.

Ether has had an incredible run in the past few months.

Ether (ETH) prices since January 1, 2021.

Nonetheless, the 90-day correlation coefficient of Bitcoin and Ether is still at a very high 0.84 and is generally increasing. That means they are increasingly moving in lockstep, even though ether still outperforms Bitcoin.

Bitcoin and Ether correlations, 90 days, as of January 1, 2021.

Some investors looking for an alternative to the king of alternatives will find fat returns on some of the Layer 1 tokens on an absolute basis. (Layer 1 platforms are those that are independent blockchains, rather than Layer 2 networks built on top of any of the Layer 1 blockchains).

“Intensifying development work, substantial funding and growing usage are behind a market rotation from BTC and, to a lesser extent, from ETH to tokens from platforms such as Solana, Avalanche and others,” wrote Noelle Acheson, Head of Markets Insights at Crypto Market maker Genesis Trading, in her must-have November Market Report. (Acheson is a former editor of CoinDesk’s Crypto Long and Short. Genesis Trading is owned by Digital Currency Group, which is CoinDesk’s parent company.)

To date, the local tokens for Avalanche, Cardano and Solana have soared …

Altcoin year-to-date returns in US dollars.

… that the only way to see other Layer 1 token returns would be to use a logarithmic plot.

Altcoin year-to-date return in US dollars using a logarithmic scale.

These three beat Ether when they were denominated in Bitcoin.

Altcoins and Ether Yield since the beginning of the year, valued in Bitcoin (logarithmic scale).

Meanwhile, the tokens that power Algorand, Cosmos, and Polkadot have declined since early 2021 when it comes to pricing these currencies in ether.

Alt Layer 1 coins Yield since the beginning of the year, price in ether (logarithmic scale).

But since the “Black Friday” sale on November 26th, only Algorands ALGO has been in the black.

Alt Layer 1 Coin US Dollar has been returning since November 26, 2021.

And none of the six on our list of top Layer 1 altcoins have seen positive returns in the past few weeks when rated at ETH, which means they have underperformed.

Alt Layer 1 Coin ETH has been returning since November 26, 2021.

[Alt ETH price returns]

According to John Wu, president of technology company Ava Labs, which developed the Avalanche blockchain, Layer 1 tokens could perform better in the coming year. He sees the perception of the additional benefits as a contribution to driving up prices in the coming year.

“I think in 2022 this trend of correlation between and outperformance of the price –

or market capitalization with – benefits and the increase in acceptance of certain chains will continue, ”Wu told CoinDesk’s television program“ First Mover ”on Thursday. “If the entire market goes down for reasons of rejuvenation or whatever, you will see an outperformance of Layer 1s, because Layer 1s are basically the best way to exploit the overall benefit in this area.”

However, the big Layer 1 players may not outperform Ethereum anytime soon if technical analyst Katie Stockton, managing partner at analytics firm Fairlead Strategies, is right.

Stockton created two relative rotation charts that measure the performance of one asset versus another based on relative strength and relative momentum.

“They show the trailing history for each coin, normalized relative to the ether, which is represented by the crosshairs of the diagram,” she explained in an email to CoinDesk. “The graph keeps moving clockwise, with the outperformance coming from coins pointing up and right and vice versa. The X-axis measures the relative strength and the Y-axis measures the momentum of that relative strength. “

(For those who want a detailed look at how this is calculated, here is a nifty guide.)

In the short term, five of the six alternative layer 1 tokens lagged behind the ether. Solanas SOL is the exception.

Short-term Alt Level 1 coins compared to Ethern's relative rotation chart (source: Fairlead Strategies).

In the longer term, ALGO, AVAX from Avalanche, ATOM and SOL from Cosmos are all weakening and moving towards the “lagging” quadrant in which Cardanos ASA is now located. Polkadots DOT, which is currently the only leading Ethereum, only barely does so and appears poised to fall into the “debilitating” quadrant.

Long-term Alt Level 1 coins versus Ether's relative rotation chart (Source: Fairlead Strategies).

“The short-term shows less potential for short-term outperformance against Ethereum,” said Stockton.

Is that really going to be the case? It may depend on big investors getting soaked in crypto right now. As their sophistication grows beyond Bitcoin, they can take their first small steps into the ether, causing the second most valuable cryptocurrency by market capitalization to rise relatively higher. However, if their knowledge continues to grow – especially with regard to the enormous transaction costs of Ethereun – they can then look for alternatives in the other Layer 1 tokens.

Then it will be a matter of timing, although timing is never easy to predict.

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