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Overview

4Q19 was a rough ride for the prices of bitcoin and altcoin at large. On the one hand, BTC still able to maintain its almost 90% YTD gains as we wrap up the year. On the other hand, markets have seen a very different story in the altcoin space this year. Large-cap names like ETH and XRP suffered some double-digit losses this year, while the values of those smaller names, such as XTZ and LINK, have doubled or even tripled in some cases. Whats behind the altcoin performance divergence, and how will this play out in 2020?

The term Alt-Season has been one of the buzzwords in the crypto space throughout the year. The fact that the general altcoin space has a decent rally in the 1H19. The Crypto Total Ex-BTC Market Caphas surged from below 48 bln to142 bln in late June, and that was pretty much the "Alt-Season." As the prices of BTC peaked, altcoin has started its six-month-long correction and failed to reclaim its 365-day moving average.The Crypto Total Ex-BTC Market Cap has given up almost all its yearly gains and approachingto where it started this year.

Figure 1: Crypto Total Ex-BTC Market Cap - YTD Chart (Source: Tradingview)

In our October publications Altcoin Season: To Be or Not to Be? andPartys Over, weve gone against the markets and being skeptical about the new beginning of the Alt-season.However, our reports also highlighted the possible divergent performances between different altcoins and the importance of picking and choosing when it comes to altcoin investing.

Despite the overall weakness in the altcoin space, weve seen some smaller altcoin names outperformed their bigger peers and even BTC, and LINK and XTZ are some of the examples. Figure 2 underlines the massive gains that weve seen in LINK and XTZ. In comparison, the Crypto Total Ex-BTC Market Capis likely to end on a quiet note, while ETH and XRP have already in the red.

Figure 2: ETH/XRP/XTZ/LINK/Crypto Total Ex-BTC Market Cap Comparison YTD (Source: Tradingview)

We believe that the increasing popularity of bitcoin derivatives trading, investment appetite, and lack of institutional interest may have attributed to the performance divergence in the altcoin space.

1. Bitcoin derivatives trading has been one of the fastest-growing parts in the crypto space. Demand for futures, options, and swaps trading has been increasing across all client segments. The spectrum of derivative trading has been getting widerwith increasing product selections, such as the upcoming BTC options trading from OKEx. We believe that the growing derivative trading demand has beendrawing the overall crypto investing needsawayfromthe altcoin space, particularly from the institutional client group. This draw-away effect has beenmore noticeable in large-cap altcoins.

Figure 3a: OKEx BTC Futures Aggregated Daily Volume (Source: Skew)

Figure 3b: BitMEX XBTUSD Open Interest (Source: Skew)

2. That fact that the investment appetite for the overall altcoin space has been decreasing over time, and high volatility could be one of the blames. Generally, assets with low volatility usually more attractive to investors or HODLers, while higher volatility assets tend to get more attention from speculators.However, over-speculation often results in massive price fluctuations,and thats the last thing that long-term investors and institutions would like to see. We believe thats the case of some of the mid/small-cap altcoins.

Figure 4: BTC/Major Altcoins 30-Day Volatility vs. Daily Returns (Source: Coinmetrics.io)

3. Lack of institutional interest could be another reason behind the altcoin performance divergence. We know that one of the reasons why BTC has been gaining value is because institutions have been buying,and BTC has always been the very first step for traditional financial giants to step into the crypto space. Although firms like Fidelity Digital Assets expressed their intention to support ETH in 2020, however, Tom Jessop, President at FDAS, admitted that the demand for ETH custody remains subdued. Moreover, for institutions that would like to expand their crypto exposure beyond BTC, additional regulatory challenges and obstacles would like to follow suit, and that could be a hurdle, especially for large-cap altcoins.

Although altcoin names like ETH and XRP have been underperforming BTC and some small altcoins, the outlook of some of the large-cap altcoins is not as gloomy as the price suggested, one of them could be Ethereum. Weve noticed that markets narrative on ETH has quietly shifted from being a utility token to more of a high-value transaction settlement application, thanks to the rise of DeFi.

Figure 5: Total ETH Locked in DeFi (Source: DeFi Pulse)

Data from DeFi Pulse shows that the total ETH locked in the DeFi system has almost reached three mln. Digital assets, financial smart contracts, protocols, and DApps that built on the Ethereum blockchain are expected to proliferate in 2020. Although the current ETH DeFi lockup portion accounts for about 2.5% of the total ETH supply, the number is expected to increase gradually in the coming years.The prices of ETH could benefit from the growing ETH lock up.Ethereums open financial system has been taking shape, and we expect the impact of this system would be more imminentand evident to the markets in 2020.

Furthermore, other major altcoins have also started to show distinctive characteristics. Some of them further go into the payment world, while some others committed to serving enterprise transaction needs. In addition to the bitcoin halving, this increasing vibrant environment could bring new impacts to the altcoin space in 2020.

Looking forward, the bitcoin halving event is expected to happen in May 2020. It will likely be a dominant theme of the whole crypto space before and after the halving occurs, and the market dynamics will be likely to change inboth the BTC and the altcoin world. The way that how investors setting up for the halving could provide implications on the sentiment, and thats something that all crypto watchers should keep a close eye on. On behalf of the OKEx teams, may the New Year bring you happiness, peace, and prosperity.

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2019: Alt-Season has comeand gone - Where is altcoin heading in 2020? - FXStreet