Not all projects thrive in a bull market — let's dive into the common factors that fuel the meteoric rise of some projects in a bull market!
Each cycle, the cryptocurrency market experiences a clear reshuffling of the top 100 cryptocurrencies by market capitalization, as some projects fail to maintain their momentum while others grow in leaps and bounds to take their spot.
The best-performing cryptocurrencies can achieve upwards of 1,000% growth in under a year whereas the worst-performing can tumble toward $0, asymptotically, without ever stopping for a break.
But what do the biggest winners have in common, and what lessons can we learn from the projects that outperform the market? Let’s find out.
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Innovation
As a fast-paced, high-tech industry with a huge amount of untapped potential, the cryptocurrency space is filled with promising startups and potentially groundbreaking new concepts.
Despite this, few projects manage to truly deliver on their promises and change the way the industry operates or how people interact with it. Those that do, however, have a chance of seeing meteoric growth when market conditions are favorable.
This is perhaps best demonstrated by Ethereum alternatives like Solana and Polygon — both of which offer a high throughput smart contract platform with low gas fees.
These projects helped to tackle one of the major challenges facing the industry in 2021 — high gas fees. This simply priced out many users from interacting with the Ethereum chain, forcing users and developers to seek more cost-efficient alternatives. As a result, Solana ($SOL) and Polygon ($MATIC) were among the best performers of the last bull market, achieving 17,000% and 16,545% growth respectively in 2021.
This was also shown by the success of projects that aimed to change the way financial incentives are distributed among stakeholders.
This includes platforms like Brave, which distributed revenue from advertising campaigns to users in the form of its reward token, known as $BAT. The token achieved 850% growth in 2021. It also includes play-to-earn (P2E) games — which rewarded users for their in-game triumphs using crypto rewards. With Axie Infinity trailblazing the P2E industry and achieving 30,670% growth at its peak in 2021.
The most disruptive projects tend to feature heavily among the best-performing cryptocurrencies, but innovation alone often isn’t enough to build lasting momentum.
Utility
Today, the vast majority of cryptocurrencies fall under the umbrella of “utility tokens” — that is, they’re blockchain-based assets designed to provide the holder with some sort of utility.
Examples include Chainlink's $LINK token, which is used to pay node operators for servicing data requests, or the $MANA token, which is used as the in-game currency in the Decentraland metaverse.
Unfortunately, most projects fail to develop a significant utility for their token, or if they do, they fail to generate awareness and adoption.
For the small number of projects that manage to offer a great deal of utility for their associated token, adoption can come quickly — driving up demand and positively influencing the token’s price.
This was perhaps best demonstrated by Binance Coin (BNB) in 2021, which became one of the best-performing large-cap assets after climbing from $37.39 to $686.31 in the span of five months — equivalent to a gain of 1,736%.
This was at least partially owed to the numerous (and growing) utilities offered by the coin, including acting as gas for BNB Chain (then-known as Binance Smart Chain), access to Binance Launchpad opportunities, discounts on Binance trading fees, and numerous further uses within the then-burgeoning BSC Chain DeFi landscape.
Combined with the regular BNB buybacks and burns, this was a recipe for growth.
PancakeSwap’s $CAKE token also put on an impressive display in 2021 — running from $0.61 to almost $44 in the span of five months fueled by the rampant growth of its yield farms.
Adoption
When you really boil it down to the basics, the only thing that really affects the value of a cryptocurrency is its supply and demand balance.
If demand outstrips supply, this creates upward pressure on price, whereas the opposite is true when supply exceeds demand. Most cryptocurrencies fail to generate significant demand and, hence, tend to see their values crushed over time due to oversupply.
Conversely, a small fraction of cryptocurrencies observes a long-term growth in demand — as demonstrated by on-chain analytics. These cryptocurrencies see an increase in on-chain activity, such as holder numbers, active addresses and transaction counts, indicating growing demand for the coin/token.
Bitcoin (BTC) is a poignant example of this. Throughout 2021, demand dramatically outpaced supply, causing it to spike from $29,000 to over $69,000 throughout 2021.
Demand for the cryptocurrency was propped up by major bullish events, including the launch of several Bitcoin ETFs, PayPal expanding its cryptocurrency service to the UK, and Tesla buying $1.5 billion worth of Bitcoin.
In many cases, events that increase public faith in a cryptocurrency or improve accessibility can help to catalyze growth. This is particularly apparent for small-cap cryptocurrencies but can also lead to sustained growth in more established assets — as was seen with Ethereum (ETH), Polkadot (DOT) and Terra (LUNA).
Because of this, many investors and traders look to on-chain analytics, including usage metrics, transaction fee revenue, total value locked (TVL) and holder counts to gauge adoption and inform their investment decisions.
Narratives
The cryptocurrency market is heavily influenced by recent events, trends and longer-term deeply rooted stories, known as narratives.
These can lead to persistent change in both investor and user sentiment and help to shape how the industry and its participants operate.
Each year is generally defined by a handful of clear narratives that help explain the cryptocurrencies that performed best in that period. These narratives can be formed based on the intrinsic value of a specific cryptocurrency or sector of cryptocurrencies, or be more forward-thinking — driving up the value of related cryptocurrencies based on some as-yet unrealized potential.
Cryptocurrency projects that are the first movers in related narratives are often among the best-performing assets, and some can go on to grow the industry and help define it as a whole.
This is perhaps best illustrated by the metaverse narrative. In 2021, major blockchain-based metaverses like Decentraland and The Sandbox went on to achieve massive growth as demand for their native tokens soared.
At the height of their growth, both secured a slot in the top 40 cryptocurrencies by market capitalization and achieved 19,433% and 23,857% growth respectively. Despite this, it was later found that a year after reaching its all-time highest ever value, Decentraland had just 56,697 monthly active users at a market capitalization of $1.26 billion (equivalent to $22,223 per user). For comparison, Google had a per-user valuation of around $444 around the same time.
This demonstrates how the right narrative can send projects to arguably inordinate valuations due to skyrocketing demand and long-term hope.
Read more: What Is Narrative Trading in Crypto?
Regulatory Environment
The regulatory environment surrounding cryptocurrencies is always evolving, which can either stifle or stimulate growth in certain sectors.
The regulatory climate can play a major role in determining the digital assets that perform best during the bull market.
While a plainly hostile approach to certain sectors or cryptocurrency classes can essentially suffocate related assets, a relaxed stance can catalyze significant growth and innovation.
This is perhaps best seen when looking at the relatively poor performance of privacy coins in recent years. Owed to the harsh regulatory view of these assets, many centralized exchanges have slowly withdrawn support for them, reducing their liquidity, availability and perceived value.
Conversely, through 2021 and 2022, several countries recognized and legalized Bitcoin, helping to confirm its legitimacy as a payment method and value storage system. This helped to maintain and grow its trading volume and improve both real and institutional interest in the asset.
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