️ Altcoins vs Bitcoin: The Untold Story

[00:00:00]Altcoins are trash and this chart proves it. But is it that easy? Actually, this here looks at the altcoin market cap relative to Bitcoin. So, this measure is total 3Es. You see it here in the background. We're looking at the market cap of all of crypto and we exclude Bitcoin from it. We exclude Ethereum from it and we also exclude the stable coins from it. So, what are all the volatile altcoins doing that are not Bitcoin or Ethereum? and how is that performance relative to Bitcoin? Or in other words, how are altcoins outperforming or underperforming Bitcoin long-term? And this story here is pretty clear. The altcoins are not good.

[00:00:40]Long-term, we should stay away. That's a story because they peaked at the beginning of 2018 and since then, we're on a long-term decline, an underperformance of more than 70% from that peak. Yes, we do get our rallies every now and then, an outperformance of roughly 300%. But currently, the risk versus reward doesn't look that attractive either. The problem is that the chart that we just looked at just shows a small part of the overall picture. Actually, what we have to look at is how does total 3es, so the altcoin market cap, compare not just to Bitcoin, but how does it compare to Ethereum? How does it compare to stocks?

[00:01:22]How does it compare to gold? Does it make sense to be in altcoins long-term versus the alternatives? Because fundamentally investing is all about opportunity costs, right? It's about should we go into A or into B. Holding just fiat currency long-term doesn't make sense. So really, we should look at relative valuation charts. Yes, the altcoin market was struggling versus Bitcoin. But check this out. This is the altcoin market relative to Ethereum.

[00:01:49]Over the last 8 years, we tended to trade in a range. Now, let's just ignore what happened here at the beginning.

[00:01:56]This was during Ethereum's early years.

[00:01:59]And also tracking the market cap of these smaller altcoins during those early years before the ICO bubble is rather noisy data. Let's just look at this recent sidewards trading range.

[00:02:11]That's this chart here. The dotted line, that's the average ratio of the altcoin market relative to Ethereum. So, currently we are bang on the equilibrium. The altcoin market is not necessarily expensive nor cheap versus EE. Now, why does the altcoin market trade in such an equilibrium versus Ethereum? Why does it not long-term outperform or underperform? I think that's because many altcoins are still directly coupled with the Ethereum ecosystem within decentralized finance.

[00:02:44]Ethereum is still 54% of all total value locked of all the capital. And even if you look at things like base or arbitum or polygon, those blockchains also heavily use Ethereum. Just have a look at this, right? This is the Ethereum chain. The largest assets in terms of liquidity, all those liquidity pools are directly coupled with wrapped Ethereum.

[00:03:10]So actually what's happening here is that the altcoins are not priced in US dollars. You might look at an altcoin and see, okay, it's worth $100 or $50.

[00:03:19]But actually, what's happening under the hood is that it's the ratio of the altcoin versus Ethereum that determines the price. So, when Ethereum goes down by say 10%, then the altcoin automatically also goes down by 10% without a single trade of the altcoin having happened because again, the altcoin is priced in Ethereum, not in US dollars. At least it's for the vast majority of alts. It's not just for the alls on Ethereum. It's also for the alls on the layer twos like B, like Polygon, like Arbitum, etc. That's why I think this trading around an equilibrium for the altcoins relative to Ethereum will persist and you can plug this in yourself, right? You can plot those charts when you're at tradingview.com.

[00:04:03]You simply enter total 3es forward slusd and then you get this chart and then you can measure this yourself when are we expensive or when are we cheap for the altcoins relative to EE and then we can of course trade based on that. Now altcoins are classical risk on investments. So let's compare them with traditional finance. In traditional finance we've got technology stocks. How did all coins over the cycles actually perform relative to say the NASDAQ 100, the leading tech index? That's over here on this chart. Total 3es forward/ NDX.

[00:04:39]NDX stands for the NASDAQ 100. And this is surprising, isn't it? From one cycle to the next, the old coins actually outperformed technology stocks. I'm simply drawing the parallel line to find the support. We could of course also be more optimistic and assume that we bounce even earlier, but let's keep the realistic scenario then. Still, the risk versus potential reward doesn't necessarily look that bad. Now, since we're already with the stock market, this is the altcoin market cap relative to the S&P 500. This goes up even more.

[00:05:15]This shows an even better riskto potential reward. And what's important here is that this slope that this is going up and not just going sideways matters. This is an outperformance of 75% over the course of 3 and 1/2 years. So while the altcoins did not necessarily outperform Bitcoin over the cycles, they did outperform stocks. Here are the altcoins relative to gold. Gold has rallied quite a bit. Now it's coming back down. The risk versus reward looks very attractive. And the outperformance from one cycle top to the next is 125%.

[00:05:53]Then why does this chart look so ugly?

[00:05:56]And why do most portfolios look like this? There are several reasons, right?

[00:05:59]So this is the bubble map. You've probably seen this before. It shows the performance of individual altcoins. And here we see all the alts that are listed on Binance over the last year. Now, why is this all red? One reason is that specifically over the last year, altcoins didn't do that well. But there's also another more fundamental reason, and that's token dilution. As in, there's new tokens that hit the market every single week. And this is an extremely important effect. Have a look at this. This is hundreds of millions, 600, 700 million of new tokens hitting the crypto market. That's just for the listed tokens on tokconomist.ai.

[00:06:45]Why does this matter? It matters because what we so far looked at was market cap comparisons. Total 3ES. So that's the market cap of the altcoins excluding Ethereum, excluding Bitcoin, excluding the stable coins. This is not the average price of an altcoin. And there is a strong disconnect here because of the token dilution. Because when the number of tokens doubles, then the price might be cut in half because the supply went now up, but the market cap might be completely unchanged. Let me show you what I mean with an example. This here is World Coin. It's the number of circulating World Coin tokens over time.

[00:07:24]This started low at a bit over 500 million and it grew to 10 times that circulating supply over the span of just 3 years. Now, not every altcoin 10xes their supply over three years, but it's a strong and very noteworthy example. It makes the point of what's going on. This here is the market cap of world coin over time. It barely changed over the last 2 years and over the last 3 years it even went up. But compare this now to the price of world coin over that same time period. That clearly went down massively, right? minus 77% over the entire time frame. The market cap again went up from 177 million to its current 1.4 billion. So a project might get more and more capital over time. It might actually acquire some demand. That does not mean that the price goes up if the supply outgrows that demand. If something grows in supply by 10x in 3 years and it doesn't grow its demand at the same rate, then of course the price goes down. And that's what happens with most altcoins. All those comparisons that we looked at were just market cap comparisons. They were not price comparisons. We don't have an index for the average altcoin price. We only have the altcoin market cap. But market cap and price is not the same because of the hundreds of millions of new tokens that get issued and unlocked every single week. So what does this mean fundamentally? Are altcoins trash? Not necessarily, right? It depends on how much token dilution we have. There are some projects that have already fully vested where we don't see any additional tokens where potentially even see token burns or token buybacks where the circulating supply is shrinking. It's a minority of tokens, but they do exist.

[00:09:21]The alternative is to just bet on falling altcoin prices. So instead of trying to buy the right altcoin, we just figure out what altcoins are the worst offenders in this. Where do we see most cash outs by venture capitalists, by early investors, by the team? When we see a very strong token dilution, we can bet on a falling price. And that's what I personally do. I don't try to find the needle in the hay stack. Instead, I just bet on the general market structure.

[00:09:50]This is my performance over the last 2 years. 48% APR with the current open positions. We are at an all-time high.

[00:09:58]And what I'm mainly doing is I just bet on altcoins doing worse compared to Bitcoin, right? We short NEA in this case and then went long Bitcoin. We went short injective and long Bitcoin. We went short Trump and long Bitcoin. And we do this over and over again. And of course, not every single trade makes money, but what matters is the long term. This was 185 trades, and on average, they made more than 5% per trade. So, this is a real edge, right?

[00:10:26]On average, a trade is held 26 days. And that's not because I'm able to identify the DEXA or the ZEC or the ATM token very early. It's just because I flip this around, right? Whatever goes down, I just bet on it to continue to go down.

[00:10:44]if the fundamentals warrant that if a lot of new tokens hit the market and the asset doesn't grow as quickly in its demand. So, are there gems to be found?

[00:10:53]Are there altcoins that can potentially outperform traditional stocks or gold?

[00:10:58]There definitely are those altcoins, but it's very important to look at both sides of the equation. So, the supply growth and the demand growth.

[00:11:06]Tokconomics should not be ignored. And yes, it might be worthwhile to find those little gems and try to get a five or 10x return, but I personally I like to just deploy more capital and then compound this rather conservatively with very little leverage over time by betting on falling altcoins. Most altcoins go down and I just want to have the odds in my favor, not against me.

[00:11:28]Instead of trying to figure out the moonshot, why not just long-term compound and make money that way? I think that's the most solid approach. If it's your first time here, feel free to subscribe. I publish here regularly. A like would be very much appreciate as well. Helps the channel grow. If you want to learn more about how to bet on altcoins relative to valuation to Bitcoin, feel free to also check out the premium membership that's over here.

[00:11:48]That's the link. It's on the screen.

[00:11:50]It's also down below in the pinned comments. See you next time. Chiss.