A Tale of Two Cryptos
Yesterday the global market cap of all crypto crossed 2T for the first time, fueled largely by gains in ETH, but also by a myriad of other altcoins notching significant gains. While BTC remains close to all-time highs, it has been struggling to break out of a tight range and has been trading mostly sideways for a few weeks. The market dynamic is certainly shifting in BTC, with institutional investors willing to buy dips and retail traders and early adopters looking to take profits and rebalance their assets, realized volatility in BTC has been driving lower and lower. This lower volatility environment is working both to bolster BTC’s credibility with traditional asset investors and also to drive capital from higher risk seeking traders into altcoins.
This bifurcation of the crypto market is nothing new, but I believe that this leg of the trend is a welcome development for the digital asset space as a whole. BTC is quickly becoming a blue chip, a stable asset but with plenty of upside potential that will continue to attract investment from traditional asset players, and stability will become a self-reinforcing attribute as the mix of investors shifts from speculators towards investors. The longer that BTC stays stable and near highs, the more comfortable investors become with it, which in turn will lessen the likelihood of any disastrous pull backs while also reduce the chance of a near term meteoric rise.
Traders who seek volatility and moon-shot potential are shifting assets instead to altcoins, moving farther down the list, focusing both on ETH but also many of the newer entrants to the space. These assets offer significantly greater risk, but they still have lottery ticket potential, and for many traders, at least for a portion of their investments, lottery tickets are exactly what they are looking for. Much like the SPAC boom, where money is pouring into nascent companies in pre-IPO parts of their lifecycle, some of these newer altcoins might become the next big thing, while many of them will be a flash in the pan and eventually die out. These investments are extremely risky, but the fact that traders are rushing to make them will eventually have the effect of sorting out the winners from the losers and might help to find the next best assets and technology.
All of this rebalancing and diversification between stable and risky assets is an attribute of a perfectly healthy capital market, and I believe that it is a testament to the rapid maturation of the digital asset market as a whole. While systemic risks remain, especially regulatory, the digital asset space is looking more and more like a traditional capital market in its functionality and asset mix. And digital assets as a whole have in turn shown that they have attributes attractive to traditional investment portfolios.
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