The state of crypto in 2021 – Part 1: the year of the altcoin

2021 has been a year of sustained growth and unprecedented development for the crypto market. Most investors will be unsurprised that the crypto market as a whole continued its meteoric growth through 2021, growing its overall market cap by more than 280% over the last 12 months.

What few could have predicted, however, is the exceptional performance of large-cap altcoins. 

While Bitcoin is up 95%, it pales in comparison to the returns on the top-performing large-cap altcoins.

It’s not just that the market caps of the biggest altcoins grew at such exponential rates.

For a more stable measure of the industry’s growth, consider where the venture capital funds have been flowing. 

According to data provider PitchBook, over $17 billion has been invested into companies that operate in the space this year – that’s by far the most in any single year and nearly equal to the total amount raised in all previous years combined.

This has been reflected in the number of new blockchain technologies entering the market – the number of tokens being traded has increased to more than 10 000 as of November, which is double that as of April 2020.  

Blockchains whose primary focus is on supporting smart contract functionality remain the most prominent players in the altcoin space. Smart contracts are self-executing pieces of computer code that require no human intervention or oversight. For example, smart contracts are what make it possible to safely borrow money at roughly 5% a year using cryptocurrencies as collateral.

No credit approval is required, nor are you required (in many cases) to disclose your name. A host of other financial applications and transaction types, such as self-executing insurance contracts, have also become available on smart contract networks like Ethereum.

Ethereum has managed to hold on to its first-mover advantage in the smart contract space, but it is now facing legitimate competitors in the form of Solana, Cardano and Polkadot. Each of which has seen thriving ecosystems spring up around them this year.

Estimates put the value of funds “locked up” in smart contracts on these networks in the region of $230 billion, with over 63% locked up in Ethereum alone. While this seems like a large portion, Ethereum’s dominance has been slowly declining in 2021, coming down from 95% in January 2021.

There’s another player in the smart contract game that showed no signs of slowing down in 2021, Binance Coin (BNB). BNB is the native currency of the Binance Smart Chain, which offers an alternative to Ethereum and other smart contract blockchains, and is gaining ground. It gained over 7% of the total value locked up in smart contracts. It offers users much lower costs than Ethereum, with pretty much all of the same functionality.

The Binance Smart Chain faces one major hurdle in securing the mass support of the crypto community, though. While its speed and low fees are attractive, it is not decentralised.

Binance is a private company, whereas Ethereum, Bitcoin and others are decentralised by nature. Binance chooses who qualifies as a ‘validator’ on its blockchain and only uses 21 validators. Founder Changpeng Zhao likened Binance to a ‘CeDeFi’ or centralised DeFi.

The Binance coin is also used as a utility token on the Binance trading exchange. This accounts for the extraordinary rise of the BNB coin over the last year.

The rise of gaming-focused cryptos

A subset of the crypto space, which is fast gaining public attention, is the gaming-focused coin space. The biggest players in the space currently include tokens like Axie Infinity (AXS), Decentraland (MANA), The Sandbox (SAND), Gala (GALA) and Enjin Coin (ENJ).

“Some of the most exciting projects in the crypto space are happening in the gaming arena,” says Hope Robertson. “Gamers are being offered ways to interact with fellow players while earning money, and there are some ingenious concepts behind this new crop of cryptocurrencies coming out of this sub-sector.”

A look at the table below shows some startling returns from gaming cryptos over a 12 month period. Axie Infinity, for example, is a blockchain-based trading and battling game that is partially owned and operated by its players.

Inspired by popular games like Pokémon and Tamagotchi, Axie Infinity allows players to collect, breed, raise, battle, and trade token-based creatures known as Axies. It was created in 2018 and has built an astonishing market cap of nearly $5.7 billion in less than three years.

Decentraland (MANA) is a virtual reality platform powered by the Ethereum blockchain that allows users to create, experience, and monetise content and applications. It allows users to purchase plots of land that they can later navigate, build upon and monetise, and though it only launched in 2017, it has built up a market cap of $5.7 billion. The Decentraland ‘metaverse’ comprises more than 90 000 pieces of land offered up for purchase and development in a virtual world.

All in all, the world of crypto has continued to grow, expand and evolve in ways that few could have imagined in 2020. While altcoins may have done all they can to steal the limelight this year, even Ethereum is yet to come close to challenging big brother Bitcoin’s top spot by market cap.

Tune in for part 2 of this article, where we take a look at Bitcoin and the rise of stablecoins.

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This article is intended for informational purposes only. The views expressed are not and should not be construed as investment advice or recommendations. This article is not an offer, nor the solicitation of an offer, to buy or sell any of the assets or securities mentioned herein. You should not invest more than you can afford to lose, and before investing, please take into consideration your level of experience, investment objectives and seek independent financial advice if necessary.

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