The introduction of exchange-traded funds (ETFs) for spot Bitcoin (BTC) has had a profound impact on the crypto market, not just for institutional investors, but also for retail investors. This has created a clear divide in the market, and we are now on the verge of a significant rebalancing.
On one side, we have small-scale investors who are now gaining exposure to Bitcoin through their advisors investing in spot BTC ETFs for the first time ever. It is only a matter of time before Bitcoin becomes a commonplace asset in these investors’ portfolios, much like gold. On the other side, we have the “OGs” of the crypto market, those who have been involved since the early days and fully embrace the principles of Web3. They invest in Bitcoin because of its decentralization and resistance to censorship. However, with the influx of new investors adding Bitcoin to their portfolios, these OGs have lost their advantage as early adopters, and they are ready to revolt.
From the perspective of an early Bitcoin investor, the largest cryptocurrency has strayed far from its original purpose of replacing the broken payments system. Unintentionally, it has become a part of the very system it was designed to disrupt. It’s comparable to discovering a hidden gem of a restaurant, only to see it explode in popularity and be taken over by a large corporation. The quality diminishes, the original purpose is forgotten, and it becomes challenging to secure a reservation.
But it’s not just about the purpose of Bitcoin. As more buyers compete for a limited supply of this finite asset, the price of Bitcoin will soar. However, it will be the major players who benefit the most, as they earn significant profits from managing BTC spot ETFs. While retail buyers with crypto knowledge can still access Bitcoin directly through crypto exchanges, surrendering the majority of profits to the world’s largest asset managers goes against the principles of Web3.
Consequently, we are witnessing a polarization of the crypto market between retail investors willing to pay for Bitcoin and those who are accustomed to getting it for free. The latter group will not wait to see if the paid ride is worthwhile; they will simply look elsewhere for a part of the market that upholds the ethos of crypto and offers direct access to blockchain without intermediaries.
This shift will serve as the catalyst for the highly anticipated altcoin season. Bitcoin maximalists diversifying their portfolios, crypto OGs searching for greater returns as Bitcoin goes mainstream, and true believers in the decentralized dream of crypto will all contribute to this transition.
So far, altcoins have lagged behind Bitcoin in terms of performance, which is typical at this stage of the cycle. However, we are beginning to see signs of a reversal. Ethereum (ETH) has been consistently posting higher highs and higher lows against Bitcoin over the past 10 weeks, indicating a potential breakout in the coming weeks. When this happens, altcoins will follow suit, as they always do, and it will be Bitcoin investors seeking alternatives who drive this transition.
As more institutions and traditional investors add Bitcoin to their portfolios, the retail crypto market will become more polarized. Amidst this reallocation of assets into altcoins, several of them will rise to the ranks of “too big to fail,” a status that has mostly been reserved for Bitcoin. This cycle will be decisive in separating the promising altcoins from the rest and determining which ones will thrive in the next bull market.
However, not every crypto-savvy retail investor will completely abandon Bitcoin. Altcoin investing requires a certain level of risk tolerance. For most investors, Bitcoin will serve as a stabilizing force in their portfolios, providing a reliable and less volatile core to balance out higher-risk investments. But as Bitcoin continues to grow, it is expected to lose some of its most dedicated OGs as they seek more decentralized alternatives and greater gains.
Regardless of how this rebalancing unfolds, one thing is certain: institutions will profit either way. Even if there is a significant retail exodus from Bitcoin, it will have minimal impact on BTC’s price direction. The scarcity, increasing demand, and institutional inflows worth billions will ensure that.
However, this shift will have a profound effect on the future of decentralized finance (DeFi). With a total value locked (TVL) of just over $100 billion compared to Bitcoin’s $1.4 trillion market cap, even a relatively small rotation into altcoins could have a significant impact on the growth of DeFi. If Bitcoin maximalists show the same enthusiasm for altcoins as they have for BTC, we are poised to witness explosive growth in the altcoin market. Regardless of which side you are on, get ready for an exciting summer.
Lucas Kiely, the Chief Investment Officer for Yield App, oversees investment portfolio allocations and leads the expansion of a diversified investment product range. He previously held positions as the Chief Investment Officer at Diginex Asset Management and as a Senior Trader and Managing Director at Credit Suisse in Hong Kong, where he managed QIS and Structured Derivatives trading. He also served as the Head of Exotic Derivatives at UBS in Australia.
Please note that this article is for general information purposes only and should not be taken as legal or investment advice. The views expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph.