Bitcoin has had a difficult start to the year. At one point the asset was down more than 31% year-to-date and, despite a partial recovery, still trades roughly 19% below its opening price for 2026. Historically, such drawdowns tend to have an amplified effect on the rest of the crypto market. Altcoins typically exhibit higher beta and stronger reflexivity, meaning that when Bitcoin declines, alternative assets often fall faster and further.
This time, however, the pattern appears different.
Bitcoin dominance, a metric measuring Bitcoin’s share of the total crypto market capitalization, has oscillated between 58.3% and 60.1% since the start of the year. In other words, despite Bitcoin’s drawdown, the broader altcoin market has not materially underperformed it. The typical downside beta observed in previous cycles, where altcoins fall 1.5 to 2.5 times faster than Bitcoin, has not clearly emerged. To better understand what is driving this divergence, Sandmark constructed a simple sector-level backtest. The methodology is intentionally straightforward: for each major crypto category, we selected the three largest protocols by market capitalization and created an equal-weighted basket on 1 Jan. The goal is not to build a perfect index but to capture broad sector trends.
The results reveal meaningful divergence between sectors.
(Source: CoinMarketCap)
Relative to Bitcoin, several sectors are notably outperforming.
The standout observation is that derivatives and trading infrastructure are leading the market, while base-layer networks are lagging. The PERP and DEX baskets outperform Bitcoin by roughly 15% and 13%, respectively, while the L1 basket, composed of Ethereum, Solana and BNB, underperforms. This is somewhat unusual. In earlier phases of crypto cycles, layer-1 tokens typically lead market expansion as new capital enters the ecosystem. Instead, the current market appears to be rewarding application-layer protocols more directly tied to trading activity.
Memecoins also show surprising resilience, outperforming Bitcoin by roughly 6.0% year-to-date. Retail speculation has not disappeared entirely; rather, it appears more concentrated. To better understand what is happening beneath the surface, we zoom into two of the strongest sectors: perpetual derivatives platforms and decentralized trading infrastructure.
Within the perpetual derivatives category, we tracked trading volume for Hyperliquid, Aster and Lighter.
(Source: TokenTerminal)
While overall derivatives activity declined modestly, the distribution of volume shifted significantly.
Hyperliquid stands out as the only protocol expanding trading volume while competitors contract. Already the largest venue in the sample, its continued growth suggests that liquidity is consolidating around the deepest and most efficient trading environment. In volatile markets, execution quality becomes increasingly important, and traders tend to migrate towards platforms offering tighter spreads and deeper order books. Hyperliquid’s recent HIP-3 upgrade, which introduced permissionless perpetual markets allowing anyone to trade futures without centralized approval, for real-world assets such as equities, commodities and FX pairs, may also be contributing to its growth. By expanding beyond crypto-native pairs, the platform has effectively positioned itself as a broader macro trading venue.
The other protocols show a different trend. Aster’s volume declined roughly 29% month-over-month, while Lighter experienced an even sharper 37% contraction. Smaller derivatives venues often struggle during periods of market stress as liquidity fragments and traders consolidate activity on the most liquid exchanges.
A similar divergence appears within decentralized finance infrastructure.
(Source: TokenTerminal)
Here, Sky emerges as the outlier. While most DeFi protocols experienced declining total value locked as market prices fell, Sky’s TVL increased by roughly 15%. Such growth during a broader market drawdown is notable. One possible explanation is that users are shifting towards yield-generating strategies without taking direct price exposure, effectively parking capital in stable lending positions during uncertain conditions.
In contrast, Aave’s TVL decline likely reflects a broader deleveraging cycle. When crypto markets fall, leveraged positions funded through lending protocols are often unwound. Borrowers repay loans or are liquidated, causing TVL to drop as outstanding debt shrinks.
Uniswap’s liquidity contraction tells a related story. Liquidity providers frequently withdraw funds during volatile periods to avoid impermanent loss, a temporary drop in value when deposited token ratios shift, especially when directional market conviction weakens.
Taken together, these metrics suggest a market undergoing leverage compression and liquidity consolidation, rather than outright activity collapse.
Looking deeper into protocol-level performance reveals another interesting pattern. The few assets delivering positive year-to-date returns are also the ones showing improving fundamental metrics.
(Source: CoinMarketCap)
Hyperliquid’s strong price appreciation coincides with rising derivatives volume and expanding market share. Sky’s token performance aligns with growing TVL inflows. By contrast, protocols experiencing declining activity, such as Aave, Uniswap and Lighter, have underperformed significantly.
Importantly, this dynamic also helps explain the sector-level results observed earlier. Much of the sector outperformance appears to be driven by a single dominant protocol compensating for weaker peers. In other words, the apparent strength at the sector level masks a market that is becoming increasingly concentrated around a handful of platforms capturing the majority of activity. This type of dispersion suggests that capital allocation within the crypto market may be becoming more selective. Rather than moving uniformly with Bitcoin, a subset of application-layer protocols, the underlying rules enabling these platforms to communicate, appear increasingly influenced by their own network activity and usage trends.
Bitcoin’s weak start to the year has not triggered the broad altcoin collapse typically seen in previous cycles. Several sectors, particularly derivatives and trading infrastructure, have managed to outperform despite the broader market drawdown. Looking beneath the surface reveals an even more interesting pattern. The assets generating positive returns year-to-date are largely the same protocols showing improving fundamental metrics, such as rising trading volume or growing TVL.
Of course, tracking a single metric does not fully define a protocol’s fundamental strength. A more complete analysis would include additional indicators such as revenue generation, fee capture, user growth and token incentive structures. Further research is required to determine whether these early signals represent a durable trend. Nevertheless, the emerging divergence suggests that the crypto market may be slowly evolving. Rather than moving purely in Bitcoin’s orbit, a small number of protocols with expanding usage are beginning to show the ability to outperform even during broader market weakness.
If this dynamic persists, it may mark an important step in the maturation of the crypto ecosystem, one where fundamentals, not just narratives, increasingly drive capital allocation.
