The desire for the No. 1 cryptocurrency faded a bit this week, a phenomenon that benefited many altcoins. This has happened before to the point where it has acquired a term of convenience -- capital rotation.

When crypto-capital rotation occurs, typically it's the coins anchoring the long-established Layer 1 blockchains that immediately benefit. This week, we saw that play out in the rise of Cardano (CRYPTO: ADA), Avalanche (CRYPTO: AVAX), and Algorand (CRYPTO: ALGO). According to data compiled by S&P Global Market Intelligence, the trio rose a respective 15%, 33%, and 11% over the period.

Capital rotation was pivoting to the top Layer 1s

For the uninitiated, "Layer 1" refers to the foundational blockchain in a network. It is the system that records transactions and stores them in what amounts to a publicly available digital ledger. The most famous example of this, not least because it is the first Layer 1 chain, is Bitcoin (CRYPTO: BTC).

Since Layer 1s are relatively solid bases for cryptocurrencies, it's often the storied ones with the most compelling use cases that benefit from capital rotation. As before, this round has to do with the retreat of Bitcoin; following a recent and sustained rally, investors have been selling out of it. This is occurring for a variety of reasons, among which (as ever) is profit-taking by the opportunistic.

It's also no coincidence that Cardano, Avalanche, and Algorand are programmable blockchains that allow for smart contract functionality. This provides scope for a great many types of applications and transactions, and is widely (also correctly, I believe) seen as a financial technology of the future. So it's little wonder that investors are plowing into such coins as Bitcoin slumps.

While the top crypto may not be at the top of many wish lists just now, the market is still hot on digital coins and tokens in general.

The economic winds are blowing favorably, especially with the Federal Reserve's decision this week to hold its key interest rate steady. Fed officials' statements that the regulator aimed to start cutting rates next year were quite the gifts for crypto bulls. Anyone with an appetite for relatvely risky investments loves lower rates, as they draw money away from conservative assets to more volatile ones.

Spot crypto ETFs looming on the horizon

Meanwhile, crypto legitimacy is in the cards. Although we won't necessarily get spot cryptocurrency exchange-traded funds (ETFs) by the end of this year, momentum is clearly building for the first approvals of these assets in the near future. Spot ETFs would allow fund managers to buy coins and tokens directly, and would probably give a notable and immediate lift to a great many digital currencies.

So as we approach the end of 2023, the environment continues to be very favorable to such assets, particularly the larger ones with solid use cases. It might end up being a very bountiful holiday season for their owners.

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Eric Volkman has positions in Bitcoin. The Motley Fool has positions in and recommends Avalanche, Bitcoin, and Cardano. The Motley Fool has a disclosure policy.

Why Layer 1 Altcoins Were on Fire This Week was originally published by The Motley Fool