Bitcoin is beginning to reassert its dominance over challengers to its cryptocurrency crown.
The original digital coin was assailed by thousands of new "altcoin" competitors in 2021 – from Solana and Polkadot to Litecoin and Dogecoin – raising the prospect of a rapid fragmentation of the crypto market.
Yet bitcoin has stemmed its loss of market share this month and started to regain ground, as rattled investors seek the relative safety of the biggest crypto player while they contend with an aggressive Fed and talk of war in Europe.
Bitcoin's share of the $1.68 trillion crypto market has risen to about 42%, from 39% two weeks ago – the first time it has registered an increase since dropping from a peak of 46% in mid-October, according to data from CoinMarketCap, which tracks 17,225 cryptocurrencies across 458 exchanges.
Market players caution that it's too early to call it a trend and note that while bitcoin has outperformed the industry, the entire crypto market has fallen this month. Nonetheless, some say 13-year-old bitcoin could continue to benefit from its crypto rivals during a more cautious investment climate.
"If risk-off persists, bitcoin will suck up the liquidity in crypto markets," said Matthew Dibb, chief operating officer of Singapore-based crypto fund distributor Stack Funds.
While most cryptocurrencies still take their price cues from bitcoin, some fund managers expect a gradual divergence or decoupling, this year that will require more discrimination.
"While many casual market observers were able to print a pretty satoshi (bitcoin investment) last year simply by watching their favorite assets go up, 2022 is likely to require a much more careful, nuanced, and active strategy," said Jeff Dorman, a chief investment officer of digital asset management firm Arca.
"Pockets of strength will periodically emerge, and catching a few of those shifts will be incredibly important for performance this year."
Solana: Canary in coal mine?
It's been a torrid start to the year for cryptocurrencies, as unnerved investors ran from risk. Yet bitcoin's 20% decline in January – to levels of around $37,000 – is the smallest among the top coins.
Its primary challenger, Ether, the coin of the Ethereum blockchain, is down 34%.
Cryptocurrencies that are connected to blockchains used to build decentralized finance applications have lost even more ground. Solana, which jumped 100-fold in 2021, is down 47%, while Polkadot is down 41%.
However, the selloff that began in December has been less volatile and has seen lower volumes transacted than bitcoin's previous route in May 2021, when it halved in nine days.
"A range between $30,000 and $40,000 for a few weeks or even months would not shock me," said Chicago-based Michal Cymbalisty, co-founder of decentralized exchange Domination Finance, adding that fears of a long "crypto winter" were overblown.
Some analysts point to Solana as the proverbial canary in the coalmine, given how fast it rallied in 2021 and its recent outages.
Sometimes nicknamed as "Ethereum killer," JPMorgan analysts cited Solana's use in non-fungible tokens (NFTs) as a reason it has been successful in gaining market share at ether's expense, while BofA analysts have said it "could become the Visa of the digital asset ecosystem."
Solana has a market capitalization of over $28 billion, which makes it the world's seventh-largest crypto, according to CoinGecko.
"Solana is a speculative asset within the crypto ecosystem, so if it rises, appetite for other altcoins will also increase," said Dibb at Stack Funds.
He also warned that a further significant deterioration in investor risk appetite could clobber some cryptocurrencies.
"If there is another risk-off wave, we could see Nasdaq drop another 5% and cryptos could get crushed. Cryptos are not a store of value as yet."