One of the major themes that has arisen since the price of bitcoin crashed to under $6000 in early February has been an increase in the dominance of Bitcoin. Whilst in early January total bitcoin dominance was below 32%, as of the time of writing, bitcoin comprises some 40% of the total market capitalization of all cryptocurrencies!
In this article I’m going to explore why this has happened, and why I think it to be a bad omen for the cryptocurrencies in general.
Bitcoin dominance: What happened, and why?
First of all, I want you, the reader, to chose between two narratives to explain the recent increase in bitcoin dominance. You have two choices. Option #1, the ‘pro bitcoin’ narrative:
“Bitcoin dominance is increasing as investors realize that bitcoin is the original and best cryptocurrency out there! They are rightly allocating their capital back to the most reliable and famous coin, because they have discovered that other coins are not as reliable, stable or big enough to deserve their investment. Furthermore, recent segwit adoption has strengthened Bitcoins appeal”
Option #2, the ‘’fear trade’:
“Investors have pivoted out of speculative alt-coins and back into bitcoin, because they see bitcoin as being ‘safer’ than other, more speculative coins. Bitcoin has relatively lower volatility in comparison to alt-coins, and investors feel safer keeping their capital in BTC”
In an ideal world the more evenly that money is spread out within the market, the better…When money is spread out more evenly, it allows investors to assess the different pros and cons of many different cryptocurrencies, giving them a more nuanced view of the market as a whole.
Which option did you pick? I think both narratives are convincing for different reasons, however, no matter which story you found more believable, it is undeniable that increasing bitcoin dominance is a ‘risk off’ trade. This means investors are getting out of coins with higher volatility/risk and into bitcoin, which is seen as more stable.
Seen from another angle, investors are saying “I know these cool new alt-coins have really interesting potential for the future, but, given the recent price swings across the asset class, I’m less interested in investing in future potential, and more interested in preserving my capital” Either way you split it, when bitcoin dominance increases, it shows investors are becoming less speculative and more prudent (put another way, in simpler terms: less greedy, more fearful).
The best perspective of all — Risk!
All markets are built up off of two emotions, greed and fear. The concept of
“flight to safety” is the idea that when people are fearful, they go back to what they know. A few years ago, flight to safety might have been expressed through investors taking their money out of the cryptosphere entirely. Today however, there is a much greater sum of money invested, and as a result cryptocurrencies are now truly their own asset class. Because of this, I think flight to safety also exists within the cryptosphere itself. Bitcoin, being the oldest and highest profile coin, is seen as a ‘safer’ investment. And so, when fear rules over greed, Bitcoin dominance increases.
A few years ago, flight to safety might have been expressed through investors taking their money out of the cryptosphere entirely… Bitcoin itself, being the oldest and highest profile coin, is seen as a ‘safer’ investment. And so, when fear rules over greed, Bitcoin dominance increases.
Where does that leave us today? Well, as I mentioned in the introduction, since early January we’ve seen Bitcoin’s dominance go up by almost 8%. This demonstrates that altcoins as seen to be more risky than bitcoin by investors. We can therefore say that:
- when times are bad, bitcoin is the ‘flight to safety’
- When the market sells off, bitcoin should decline at a slower pace compared with alt-coins
In particular I’ve been following both Stellar and Cardano since early January. Both of these coins are looking quite weak at the moment, especially compared to a month ago. They declined when bitcoin declined, but so far haven’t managed to recoup their losses.This is also true more generally across the market (litecoin being a notable exception). It shows people don’t want to invest in the technologies that they offer, and prefer to put their money in Bitcoin instead. Investors are becoming less open-minded and less willing to speculate on smaller alt-coins. As a result, the investment and development of new crypto solutions will suffer.
You’ll notice I haven’t mentioned bitcoins price. That’s because I am primarily concerned with relative value. I believe in relative value trading, and I think it can reveal a lot of interesting about the cryptocurrency market. Price can be volatile, highly emotional and unstable. Relative value tells us a completely different story. With a relative value perspective, we can see the market is increasing in fear, even if this isn’t what is reflected in Bitcoins price.
Conclusion — Back to the fundamentals!
If you’re a true optimist towards cryptocurrencies, the price is less important than the vision of the future. A future where decentralized currencies can be used with total ease and convenience. Admittedly, this hasn't happened yet, but steps are being taken towards this future every day. In any case, we can say that bitcoin in its current form isn’t able to deliver this future in the short term. Following on from this logic, presumably at some point another coin will takeover from bitcoin.
Investors are becoming less open-minded and less willing to speculate on smaller alt-coins. As a result, the investment and development of new crypto solutions will suffer.
Try to envision how you believe the cryptosphere will develop in the future. As I’ve laid out, I think the best scenario would be having a balanced, developed market where flight to safety happens based off of fundamentals, and quality, rather than from legacy and reputation. I want to see investors acting with both prudence and confidence, and I don’t think increasing bitcoin dominance reflects this.