Last week’s regulatory crackdown in the United States resulted in investors abandoning smaller tokens, leading to the dominance of bitcoin (BTC), ether (ETH), and stablecoins in the crypto market surging to its highest level since February 2021. As per a report by digital asset research firm K33 Research, the combined market capitalization of the two most prominent digital assets and stablecoins constitutes 80.5% of the total cryptocurrency market worth approximately $1 trillion.
Altcoins, which include alternative cryptocurrencies, experienced a significant sell-off after the US Securities and Exchange Commission (SEC) declared multiple tokens as securities in lawsuits against crypto exchanges such as Binance, Binance.US, and Coinbase. Altcoins such as Binance’s BNB, Cardano’s ADA, and Solana’s SOL, which were labeled as securities in the lawsuits, lost up to 30% of their value over the week.
If the SEC’s accusations that many tokens are securities are valid, token issuers and exchanges will face an increasing burden to register with the SEC. Robinhood and eToro, two popular retail trading platforms, have decided to halt US trading for some tokens flagged by the SEC, while market makers have most likely sold tokens in anticipation of lower trading demand. K33 noted that the legal battle could go on for several years, limiting capital inflows to the assets under SEC scrutiny, and strengthening the investment case for BTC and ETH as safer bets from regulatory risks.
According to K33, “funds will likely retort to a hands-off approach due to excess compliance work and overall low trading volumes, disincentivizing market participants to engage. This could limit liquidity further onwards and lead to a prolonged slow market.” The report further added that “over the next year, we could thus see the BTC and ETH dominance strengthen further due to the cost and risk burden of allocating capital to altcoins from the 2017 era and beyond.”
BTC and ETH have outperformed smaller tokens this year, retaining much of their gains from the crypto market recovery earlier this year. According to CoinDesk data, BTC and ETH have gained 57.3% and 45.4% year-to-date, respectively.