In 2021, the price of a single Bitcoin (BTC) broke $60,000. And the total value of the cryptocurrency market reached $2.5T. Indeed, the vision of creating a decentralized financial system has captured the world’s imagination. But so far, this promise has yet to materialize.
Over the past decade, the crypto market has faced numerous controversies and skepticism. Yet, believers have seen it as a digital stepping stone to financial freedom. It is no wonder Bitcoin’s value has risen by 11,000% in nine years. In a relatively short period, cryptocurrency trading created millionaires much faster than in many other financial markets.
Amid all this, the crypto market has not yet escaped worries about its extreme volatility. Given its inverse relationship with inflation, its predictability has improved in the past two years.
With that, crypto trading appears to be more accessible today, especially since more and more cryptocurrencies have entered the market. This move gives cheaper options to many cryptocurrency traders, especially newcomers.
Hence, we will explain how the market has behaved since the pandemic and list the best alternative coins or Altcoins to invest in.
The Increasing Predictability and Returns of the Cryptocurrency Market
Over the years, the cryptocurrency market has always been associated with volatility risks. Even so, several technical analysis methods, like the Simple Moving Average (SMA) and Average True Range (ATR), have become applicable to tracking and forecasting price direction and volatility.
Market sentiments still drive the buy and sell volume. With that, traders remain cautious since analyzing and predicting price trends is far more challenging than stocks.
But what’s noticeable is its inverse correlation with inflation for almost two years. In 2021, cryptocurrency prices peaked and set new all-time highs. But as inflation sped up in the first quarter of 2022, crypto prices started to drop.
In the second quarter of the same year, the US inflation peaked and reached 9.1%. In turn, crypto prices immediately took a nosedive. This made the slight crypto price rebound from January to March a bear trap.
However, as inflation started to decelerate, crypto prices became more stable. They moved sideways with a gradual rise, although interest rate hikes appeared to have slowed down the rebound. When the Fed paused interest rate hikes, crypto price increases accelerated.
But from mid-June to September, crypto prices moved in a downward pattern again. The downtrend can be attributed to the inflation uptick from 3.2% to 3.7%, which exceeded the 3.6% consensus. When inflation became manageable in October, it decreased to 3.2% before landing at 3.1% in November.
In turn, crypto prices regained momentum and showed sustained increases in the following months. And even now, crypto prices continue to move upward.
The images below show how several cryptocurrencies moved inversely with US inflation from the fourth quarter of 2021 to the present. We can see the moderately strong inverse correlation between cryptocurrencies and inflation. It is more noticeable in Ethereum (ETH) and Binance (BNB).
Indeed, the predictability of cryptocurrencies has increased in the past two years. While their volatility remains higher than stocks, the decent correlation means ease in predicting price changes. I used inflation as the X while the cryptocurrencies were the Y variable in 76 observations.
Inflation and Bitcoin (62% Inverse Correlation)
Historical Prices Taken from Yahoo Finance
Correlation done by the Author
Inflation and Ethereum (67% Inverse Correlation)
Historical Prices Taken from Yahoo Finance
Correlation done by the Author
Inflation and Binance (73% Inverse Correlation)
Historical Prices Taken from Yahoo Finance
Correlation done by the Author
Inflation and Dogecoin (54% Inverse Correlation)
Historical Prices Taken from Yahoo Finance
Correlation done by the Author
More interestingly, the cryptocurrency market has given high returns over the past decade. This is comparable to primary US stock market indices, such as the S&P 500 (SPX) and the NASDAQ Composite Index (IXIC). Unsurprisingly, many crypto traders saw considerable improvements in their finance trackers in a relatively short period.
The table below shows how the stock and crypto prices have changed in the past five years. I used the Sharpe Ratio to weigh the risks and returns of both markets.
| Sharpe Ratio |
|
S&P 500 (SPX) |
NASDAQ Composite (IXIC) |
Crypto Market Average
BTC, ETH, BNB, and DOGE |
| Annual Returns |
12.27% |
16.82% |
83.58% |
| Risk-Free Rate |
3.97% |
3.97% |
3.92% |
| Standard Deviation |
17.92% |
20.91% |
113.66% |
| Sharpe Ratio |
0.47 |
0.62 |
0.70 |
Clearly, the crypto market had the best average annual returns with 83.58%. If we average the crypto column without BTC, it will decrease to 54.24%. Either way, crypto returns are higher than the SPX and IXIC, ranging from 10% to 20%.
However, crypto volatility has been overwhelming at 113.66% compared to SPX and IXIC at only 17.92% and 20.91%, respectively.
Without BTC, the volatility of the crypto market will be higher at 126%. Nonetheless, the crypto market still prevails as average annual returns outweigh volatility or the standard deviation.
More interestingly, the Sharpe Ratio without BTC will be 0.66, still higher than SPX and IXIC. Hence, even without BTC, the crypto market Sharpe Ratio will still exceed the stock market.
The Best Altcoins For Your Investments
Bitcoin has led the crypto market boom ever since its inception. That is why more traders are drawn to it. But in recent years, many alternative cryptocurrencies or Altcoins have appeared and are more exciting today. These are the top Altcoins cryptocurrency traders can invest in.
Binance (BNB)
Current Price: $307.49
Market Capitalization: $46.44B
Binance Coin (BNB) is a utility token often used to pay fees related to crypto trading. You can also use this to get discounted trades on the Binance exchange. Even outside Binance, you can use this token for other payment processing like booking travel arrangements. Additionally, many businesses are accepting BNB for service payments.
Many critics remain apprehensive of BNB, thinking it is less decentralized than other Altcoins. Also, they are wary of its affiliation with Binance, which has recently made a settlement payment with the DOJ after pleading guilty to violating the Money Laundering Act.
Even so, BNB proves to be a solid company with total digital assets of $78.8B. It also has a very low reliance on BNB coins, as they only comprise 4% of the total token reserves. So, BNB can cover all payments and avoid becoming another FTX.
Moreover, BNB coins appear to be the most predictable relative to macroeconomic changes. In the previous section, it has the highest correlation with inflation. It also has the best average annual returns with 104%. Volatility is very high at 174%. However, the Sharpe Ratio of 0.76 shows returns outweigh the risks, making it an excellent alternative to Bitcoin.
Ethereum (ETH)
Current Price: $2,244
Market Capitalization: $269.84B
Ethereum (ETH) represents nearly $300B of trillions of the total crypto market capitalization. Of the 26,000 cryptocurrencies available today, ETH is the second-largest one. This also makes ETH the largest altcoin in the crypto market.
Bitcoin is characterized by decentralization. Meanwhile, ETH can be considered a distributed computing network since its users may use the blockchain to operate decentralized applications. Even better, ETH is often used to host smart contracts. As such, many business establishments started accepting ETH contract payments.
In Singapore, government agencies are accepting ETH smart contracts as payments for their services.
ETH is highly sensitive to macroeconomic changes, given its 66% negative correlation with inflation. This makes its predictability and volatility more manageable today. Since 2017, its value has tripled, with volatility relatively lower than most altcoins listed here.
The only downside of ETH is the exceptionally high fee for doing transactions.
Dogecoin (DOGE)
Current Price: $0.081
Market Capitalization: $11.6B
Dogecoin (DOGE) started as a meme in 2013, making it the original meme coin. Nonetheless, a dedicated community with creative memes helped it become a popular cryptocurrency.
However, DOGE still appears riskier than Bitcoin despite having some big backers. Over the years, it has fluctuated to extreme lows and highs, driven by market sentiments. It seems logical, though, as it has yet to prove its real-world use cases.
Even so, it has already demonstrated its sensitivity to macroeconomic changes. With a correlation of 54%, it has a moderately inverse relationship with inflation. So, as inflation increases, DOGE prices may decrease at some levels.
Most importantly, it has notably increased in the past five years, with average annual returns of 58%. It also had an impeccable Sharpe Ratio of 0.52 despite its high standard deviation of 104%.
Tron (TRX)
Current Price: $0.104
Market Capitalization: $9.2B
Tron (TRX) originated in Singapore in 2017 as a decentralized blockchain. By December 2021, it became known as a decentralized autonomous organization (DAO). Today, TRX has nearly 200 million accounts with about 88B circulating market supply.
Currently, it is valued at $0.104. This is a 4,050% increase from its launching price of only $0.0025. With that, TRX is seen as one of the world’s fastest-growing cryptocurrencies.
Bottom Line
Despite criticisms and controversies, the cryptocurrency market has succeeded and prospered over the years. Bitcoin remains the favorite, but with more than 20,000 available choices, crypto traders may look for better and cheaper alternatives.
Their characteristics and purpose may differ from Bitcoin, but these also have the potential to bring trading success. However, traders may have to be careful to pick the right ones, depending on their risk appetite and familiarity with the market.
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