In our previous post, we discussed the strong performance of cryptocurrencies during the recent banking crisis. One notable development in the first quarter of 2023 was the relative outperformance of Bitcoin compared to other cryptocurrencies, with Bitcoin rising by 68% while Ethereum grows 47% and the broader Cryptocurrency 30 Index (CCI30) increased by 39% (per 27.03.23). Based on our quantitative framework, we have advised our clients to significantly overweight Bitcoin in their crypto portfolios in the past months.
Reasons for Bitcoin’s Recent Outperformance vs. Altcoins
Historically, Bitcoin tends to outperform during periods of high uncertainty and volatility. Over the last few months, this outperformance can be attributed to several factors:
- Institutional acceptance: Bitcoin has the highest acceptance among institutional and professional investors and is widely regarded as the safest store of value among crypto assets.
- Regulatory uncertainty: Gary Gensler, the head of the US Securities and Exchange Commission (SEC), claimed that “everything but Bitcoin” could be considered a security in the world of cryptocurrency. This statement introduced additional scrutiny and regulation for other assets such as Ethereum, Ripple, and Solana. Although many legal and security law experts disagree with Gensler’s assessment, the regulatory uncertainty surrounding altcoins has hindered their price growth.
What to Expect Next
On April 12th, the Ethereum network is expected to complete its Shanghai upgrade, unlocking more than 17 million staked Ether (about 15% of ETH’s supply) for withdrawal. These tokens have been locked up by validators for the last 2.5 years in exchange for an annual yield of 3-7%. Many investors staked their ETH tokens during the 2021/22 bull run and have since been unable to sell them.
While the Shanghai upgrade is a positive step for the evolution of cryptocurrencies, we anticipate that the release of these tokens will result in additional selling pressure, causing Ethereum to underperform compared to Bitcoin in the coming weeks. Our quantitative crypto indicators suggest that volatility will remain high in the upcoming weeks, with Bitcoin continuing to benefit from this uncertainty relative to the broader crypto market.
Further Reading:
Nasdaq: SEC’s Gensler Warns Crypto Investors, but Differentiates Bitcoin
Bloomberg: Ethereum’s Shanghai Upgrade to Enable Withdrawals Set for April
