Bitcoin had a nice 2023. Why smaller crypto assets could now see bigger gains. - MarketWatchMarketWatch Site Logo

Welcome back to Distributed Ledger. This is Frances Yue, crypto and markets reporter at MarketWatch.

Bitcoin BTCUSD, +4.22% rallied over 150% in 2023, as the world’s largest cryptocurrency by market capitalization outperformed smaller coins. But it may soon be time for smaller cryptocurrencies to shine, according to analysts at Pantera Capital.

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Altcoin outperformance to come?

Crypto bull cycles tend to have two phases, according to Cosmo Jiang, portfolio manager of liquid strategies at Pantera and Erik Lowe, head of content at the firm. In the early stage of a crypto bull market, bitcoin tends to outperform other crypto assets, while in the late stage smaller coins tend to perform better.

Crypto rallies usually start with bitcoin, as it’s the most widely-offered and liquid digital asset, and often the first choice for first-time investors, before they seek exposure to other coins, the Pantera analysts noted.

Bitcoin’s daily trading volume averaged $18 billion in 2023, while that stood at $8 billion for ether, a according to the analysts.

However, if the crypto rally continues, investors may search for tokens with higher growth, the analysts noted. There was evidence of this in the past, with the rise of “altcoins,” or cryptocurrencies other than bitcoin, such as decentralized finance and nonfungible tokens in 2020 and 2021, the analysts said.

During the past two crypto bull cycles since 2015, the so-called altcoins went up so much in the second phase that they outperformed bitcoin during the entire cycles, the analysts noted.

To be sure, cryptocurrencies remain highly volatile in a nascent market that only got off the ground in 2009. Also, smaller cryptocurrencies often post even more risks than bitcoin. Multiple crypto projects collapsed in 2022, as the Federal Reserve began raising rates from nearly zero.

“Perhaps the most feasible way to generate alpha in the space is from maintaining consistent exposure, investing in altcoins that have fundamental reasons to appreciate multiples more than bitcoin in total,” the Pantera team wrote.

“Our thesis is that altcoins underlying protocols that have product market fit and are generating real revenues with strong unit economics will perform best in the coming cycle, just as one would expect across other asset classes like equities,” the analysts noted. It highlights the importance of token selection for investors, according to the analysts.

VanEck to shut down bitcoin futures ETF

VanEck said Wednesday that it will liquidate its bitcoin futures exchange-traded fund at the end of this month, as the firm expects investor appetite to shift to newly approved funds investing directly in the cryptocurrency.

The ETF sponsor said shareholders may sell their shares in the VanEck Bitcoin Strategy ETF until the market closes on Jan. 30. After the close, the ETF will be delisted.

VanEck made the move after it launched a spot bitcoin ETF HODL last week, along with several other asset managers, after the Securities and Exchange Commission greenlighted spot bitcoin ETFs for the first time ever on Jan. 10.

“We believe investor appetite would switch from products offering bitcoin-futures exposure to direct bitcoin exposure,” Kyle DaCruz, director of digital assets product at VanEck, wrote in emailed comments to MarketWatch.

“Spot products should more closely track the price of bitcoin, as they don’t incur the costs associated with rolling futures contracts,” he said.

Crypto in a snap

Bitcoin falls 7.3% in the past seven days and ether gained about 2.5%, according to CoinDesk data.

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