- Noelle Acheson is the head of market insights at Genesis Trading, a crypto trading and lending shop.
- Acheson shares 3 primary factors driving traders to rotate from bitcoin into altcoins this year.
- She breaks down why ethereum layer-two scaling solutions are a group to watch in the year ahead.
If Friday’s Omicron variant-triggered sell-off across global financial markets is any indication, bitcoin is still very much a risk-on asset instead of the digital gold that it is seeking to become.
“That means that many investors have it in their macro portfolios and when they need to move to more defensive positions, they are going to reach for the most volatile, most liquid thing and just get rid of it to raise cash and move into something more defensive,” Noelle Acheson, head of market insights at Genesis Trading, said in an interview.
Amid the whipsaw price action on Black Friday, bitcoin fell below $54,000. Come Monday, the largest digital currency had regained some ground and was hovering near $58,000 as of Tuesday afternoon in New York.
The return to optimism was not unexpected for Acheson, who believes that the crypto market was severely punished by the thin holiday weekend trading and the prospect of a vaccine-resistant Omicron variant.
However, as more information about the “extremely mild” symptoms of the variant emerges, investors could potentially shrug off the fears and drive a year-end rally for bitcoin. According to a Genesis Trading poll on Twitter and LinkedIn, the majority of the participants expect bitcoin to land between $50,000 and $100,000 by yearend while a considerable number of them expect bitcoin to surpass $100,000.
"I really didn't expect that much optimism in the market," Acheson said.
She anticipates bitcoin to end the year higher than current price levels given the strong tailwinds that have been building around it this year. They include growing institutional interest, the launch of the first futures-based bitcoin ETFs, and lower leverage in the market.
One thing that could derail bitcoin's upward trajectory is whether the Omicron variant and rising inflation will change the timing of the Fed's rate hikes in the year ahead. Stocks and crypto assets were broadly down immediately after Fed Chairman Jerome Powell made some surprisingly hawkish remarks about potentially completing its bond purchase tapering sooner in a Tuesday testimony before the Senate Committee.
3 factors driving the rotation into altcoins
While some investors sell bitcoin for defensive assets when the market gets choppy, others have liquidated their altcoin positions in order to rotate into bitcoin, Acheson noticed in the Black Friday sell-off.
Over the past year though, the opposite trend is at play as investors often take profits off their bitcoin holdings and rotate into altcoins. The phenomenon is seen in Genesis' trading and lending activities.
The firm's third-quarter report noted that bitcoin demand continues to trend downwards due to a significant decline in BTC- denominated trading opportunities. Meanwhile, investor appetite shifted to altcoins, especially layer-one protocols including solana (SOL), terra (LUNA), avalanche (AVAX), and fantom (FTM), the report said.
The rotation shows that institutional investor interest for altcoins is growing even faster than that of bitcoin, which can be attributed to three factors, in Acheson's view.
One positive catalyst for altcoins lies in the technological progress many layer-one blockchains including solana, avalanche, and ethereum have made. Ethereum has burned over 1 million ether tokens (the equivalent of $3.8 billion) since the rollout of EIP-1559.
Another reason stems from investors' search for yield in a low-yielding environment. With real interest rates near zero or even in the negative, the allure of getting into altcoins that could return more than 10,000% in one year is hard to resist.
Finally, the narratives around themes like the metaverse, play-to-earn games, and non-fungible tokens have also been driving inflows into the three respective sectors of altcoins.
To be sure, the smaller the altcoins are in market cap, the higher risks they tend to bear. Metaverse-linked tokens such as Decentraland (MANA) and The Sandbox (SAND), which have outperformed on the back of Facebook's corporate name rebrand momentum in the past few weeks, were down around 6% and 4% in the past 24 hours, according to CoinMarketCap.
Themes to watch in 2022
With 2022 just around the corner, Acheson is focusing on bitcoin's DeFi capabilities, an overlooked area that could get more interesting in the coming months.
Bitcoin's taproot upgrade, which was activated about two weeks ago, aims to improve transaction privacy and network efficiency. The upgrade makes it easier for developers to write smart contracts on bitcoin and broadens the potential use cases for bitcoin, according to Acheson.
The trend is worth keeping an eye on also because Jack Dorsey's Square has revealed plans to build a decentralized exchange called "TBD" on bitcoin.
"When they eventually launch in whatever version they launch with," she said, "it will take bitcoin and decentralized finance a bit more mainstream by bringing it into people's wallets in the format they are already familiar with while involving financial institutions and all the compliance that implies."
Another big narrative is scaling, which is mainly manifested in the layer-two scaling solutions for ethereum and the Lightning Network for bitcoin. The ethereum network specifically has seen slow transactions and high fees as more decentralized applications are built on top of it.
"If you are going to buy an NFT for $100, you don't want to pay $40 in transaction fees. For most of November, the transaction fees on ethereum were over $40 and hitting $60 at one stage, that's just too hard for most retail users," Acheson said. "So scaling is becoming an increasingly pressing issue."
Ethereum layer-two scaling solutions have about $6.9 billion worth of cryptocurrencies locked up in them, as of Tuesday, according to layer-two tracker l2beat.com. Some of the most well-known layer-two networks include Polygon (MATIC), Loopring (LRC), Boba Network (BOBA), as well as the tokenless Arbitrum and Optimism.
