Alt season is here? DeFi tokens taking on Bitcoin for crypto dominance

With Bitcoin dropping below the $12,000 level and pulling back to $11,400 in the last few days, altcoins also seem to have lost their momentum, even after their impressive gains since the start of 2020. However, some believe that “alt season” is alive and well and that cryptocurrencies still have room to grow, even after tokens like Chainlink and others have grown by more than 100%.

The rising price of the dollar may have been the major reason for the recent drop in Bitcoin’s (BTC) price, with safe-haven assets such as gold having dropped as well. However, many believe that a pullback for the dollar is likely, especially with the U.S. stock market being so overvalued. As such, it is possible that alt season will resume alongside Bitcoin regaining its momentum.

While an alt season is characterized by altcoins outperforming Bitcoin, this usually takes place when the price of Bitcoin itself is rising in value. Most major altcoins are correlated with Bitcoin, and when BTC rises, some altcoins jump even higher, and vice versa. Jonathan Hobbs, author of The Crypto Portfolio and former digital asset fund manager, told Cointelegraph that the boom can be attributed to three factors:

“First, altcoin charts looked good, with Ethereum leading the charge. We saw the top one-hundred altcoin dominance versus Bitcoin chart break out of a two-year falling channel in July. Second, there has been a lot of hype around DeFi projects such as Chainlink, Aave and SNX. Third, Bitcoin has either gone up or traded in a range since the March crash, which is usually good for altcoins in dollar terms. But if Bitcoin takes a dive from here, we could see the altcoins which went parabolic fall much harder.”

So, what is driving the recent surge, and does it affect only specific groups of tokens or assets with certain characteristics? Here’s a deeper look into the apparent alt season as Bitcoin dominance continues to slip to a yearly low.

2017 all over again?

In 2017, as the price of Bitcoin rose to its all-time high, several other digital assets also began to gain traction, many of which related to initial coin offerings or other forms of fundraising. Some of these assets outperformed Bitcoin tremendously and even continued to gain value as BTC began to drop.

BTC began to lose market capitalization dominance in February 2017, dropping from 86% at that time to the 50%–60% range by the end of 2017, during the rally. Following its crash in price, Bitcoin’s dominance dropped to less than 35% in January 2018 before recovering throughout 2018 and 2019.

While Bitcoin’s dominance has been decreasing since the start of 2020, it’s currently sitting at 58%, far from its lower levels in 2018. The market is also different from what it was in 2017, as exchanges and other venues have raised their standards and regulated options for altcoin investment have proliferated. Ryan Watkins, research analyst at Messari, told Cointelegraph that projects themselves are also showing major improvements:

“The biggest difference between this bull market and last bull market (2017) is that the market is rewarding live products with legitimate value accrual. Many protocols actually produce cash flow for users. This is a major difference from vaporware projects in 2017 that raised ridiculous sums of money without anything more than a whitepaper.”

During 2017, hype and greed fueled much of the rally. As ICOs made spectacular returns for investors, more money poured into the altcoin market. Fear of missing out led many to invest during this time, and while many were left holding hefty bags of worthless tokens — most of which was on the Ethereum blockchain — there are still more Ether (ETH) wallets holding a profit than there are Bitcoin wallets with funds. According to Ilya Abugov, open data lead at analytics platform DappRadar, the previous alt season was created by hype and there are some similarities to the current one. He told Cointelegraph:

“I think we are seeing a lot of similar negative dynamics. Projects start to collect catchy in trend features. There is less and less scrutiny in terms of quality. Furthermore, the regulatory angle looks to be largely ignored.”

Alt season or DeFi season?

While the 2017 alt season affected digital assets in several subsets of the cryptosphere, current rallies seem to be, in one way or another, related to the decentralized finance space, especially since the advent of yield farming, which saw Compound’s COMP token double its price in the first week of trading.

Other governance tokens related to DeFi have also outperformed Bitcoin, including Aave’s LEND, which has risen by almost 5,000% this year, and yEarn Finance’s YFI token, which has surpassed the price of Bitcoin per unit at a market cap of roughly $425 million, rising more than 300% in the past month and over 15,400% in its first week of trading.

However, it’s not only governance and reward tokens that are surging. Infrastructure projects such as Chainlink’s LINK, which provides a network of decentralized oracles needed for some DeFi applications like insurance, have also been gaining traction. Waves has also seen growth on the back of its DeFi cross-chain project, Neutrino USD (NUSD), which aims to bring stability and interoperability to the DeFi ecosystem. According to Watkins, the alt season has been mainly driven by the growth of decentralized finance: “DeFi has already triggered an alt season. The excitement is causing everyone to take a second look at every category in crypto, of course with DeFi leading the way.”

As such, one could say that DeFi is to the current alt season what ICOs were to 2017’s alt season. However, it’s worth noting that price surges, although impressive, are still considerably small when compared with 2017. It’s also worth noting that while DeFi has been growing exponentially, the amount of funds locked in DeFi is still small compared with the numbers generated by ICOs in late 2017. There is currently over $7 billion worth of tokens locked in DeFi protocols, while the ICO of EOS alone raised a record-breaking $4.1 billion.

While DeFi may not be as hyped up as ICOs were, there are still a number of concerns that could signal the demise of DeFi if not dealt with. There are still many security issues within the DeFi ecosystem that have resulted in faulty protocols and malicious attack vectors for several projects, and governance is also a growing concern within the space. There is also the question of Ethereum’s sustainability, as the blockchain continues to be under more pressure.

The current hype is also concerning, especially in a market where a cryptocurrency such as Dogecoin (DOGE) can be pumped through a social media challenge and memes take the form of real projects. There is no question that mindless speculation is a huge part of the current alt season, if there is one going on. Ben Zhou, co-founder and CEO of Bybit, a crypto futures trading platform, told Cointelegraph that DeFi tokens are indeed driving the altseason. He added:

“The 2017 altseason hype was followed by a collapse. Whether or not the same will happen this time is still to be seen. But if there is another trial by fire, those altcoins that pass the test will have proven themselves and earned their rightful place next to the big brother Bitcoin, even if they will likely still long remain junior partners.”

Can institutions create an alt season?

Institutional interest and investment options for altcoins are also on the rise. With institutional money flowing in, it’s possible that a lasting alt season may be triggered. For example, open interest for Ether options contracts has more than quintupled in the last three months, sitting at around $450 million.

Back in July, crypto investment fund Grayscale also announced that the firm’s Bitcoin Cash (BCH) and Litecoin (LTC) funds will be available for public over-the-counter trading following approval from the United States Financial Industry Regulatory Authority. Then, at the start of August, Grayscale filed a registration statement on Form 10 with the U.S. Securities and Exchange Commission for its Grayscale Ethereum Trust, designating it a SEC reporting company if validated.

Additionally, Grayscale has also revealed a growing demand for alternative cryptocurrencies from institutional investors, which make up almost 90% of its demographic. Investors have been aiming to diversify their positions in crypto by buying into the firm’s Grayscale Digital Large Cap Fund, which holds multiple altcoins.

Further supporting DeFi as a possible catalyst for alt season, Genesis, a digital currency prime broker, has revealed that institutional clients are also showing demand for high-yield options within the cryptosphere, mostly caused by the yield farming phenomenon.

However, regulated options are still scarce for altcoins, as more regulation is still needed, especially when it comes to DeFi. Once this happens, it’s possible that the hype will be toned down by the more constricted market, much like it was during the crackdown on ICOs by the SEC.

Not so bullish: Alt season is over

While things may seem promising for altcoins, especially in the DeFi space, others believe that the so-called alt season may be over or is soon to be over. A recent blog post by Santiment, a cryptocurrency analytics firm, claims that Bitcoin will soon regain its falling dominance as altcoins plunge.

According to the firm, profits from the alt season may flow back into stablecoins/fiat or Bitcoin, fueling a further rally for the latter: “Alts will enjoy the party, one by one, crazy money will move from one to another, there are still some alts to pump (though their number is getting less and less). [...] After process is over either we all together go down, or Bitcoin will go up alone.” Not only does Santiment believe that alt season is over, but some believe that a strong dollar may keep Bitcoin’s rally from taking place, thus putting a lid on alt season as well.