5/25 ANDY HOFFMAN (CryptoGoldCentral.com): Whereto Bitcoin Dominance, in the Current Environment?
One of the most misinterpreted metrics in the crypto space is “Bitcoin dominance”; i.e., Bitcoin’s market capitalization divided by the market cap of the entire cryptocurrency market. Which, given that the space is so top-heavy, is dominated by the movements of a handful of altcoins…particularly, Ethereum.
The cons of this metric are that pre-mined altcoins typically include all pre-mined units, even if not yet distributed to the public…kind of like, if a stock included authorized shares in its market cap, despite not yet being issued. Moreover, market cap dominance does not correlate with “real world dominance” – which Bitcoin is only increasing, with “use cases” like THIS one…
https://twitter.com/SGBarbour/status/999698571342499841
In other words, falling Bitcoin dominance doesn’t mean Bitcoin is being used less, relative to altcoins – any more than rising Bitcoin dominance means it is being used more. Thus, it simply measures speculation – with no correlation to real world usage… and an inherit bias towards altcoins, given that pre-mined coins are included in market capitalization calculations, and most altcoins have no issuance limits.
That said, Bitcoin dominance is very useful for gauging investor sentiment. Some would say it also measures expectations for future altcoin usage – but at this early stage of altcoin development; in the aftermath of a major boom and bust market cycle; I’d say sentiment, and the level of crypto speculation, are it’s best “use cases” at the moment.
As you can see, Bitcoin dominance was 80%-85% from 2013 through early 2017…when, amidst the height of a terrifying “scaling debate,” investors not only speculated that Bitcoin would be usurped by Ethereum and other altcoins, but the ICO bubble inflated.
https://coinmarketcap.com/charts/#dominance-percentage
Before Bitcoin’s scaling debate was resolved – actually, while it still raged in June 2017; the ICO bubble popped, with Ethereum at a whopping 31% of total crypto market cap…nearly overtaking Bitcoin’s 37%. At which point, Bitcoin dominance surged back to 67% - peaking in early December, just before it reached $20,000. In fact, as Bitcoin was surging to its ATH, altcoins were getting hit hard.
However, to nearly everyone’s surprise, a major inflection point was at hand – as starting in mid-December, Bitcoin dominance plunged, despite the sector getting hit hard. Partly due to BCash’s biggest pump-and-dump fraud ever – in which, they colluded with everyone from CNBC to Coinbase; and partly, the entrance of newly minted crypto hedge funds January 1st; Bitcoin dominance had plunged to 32% by the second week of January – at which point, the entire sector entered a vicious correction.
As the correction raged on, Bitcoin dominance rose back to 45%, where it peaked in early April - and since then, has dipped back to 38%. Many industry observers, myself included, thought it would rise higher after such a huge sector decline – causing massive altcoin losses, of in many cases 90%. But it didn’t, and in the current environment of heightened uncertainty, with opinions on whether we’ve hit bottom split right up the middle, altcoin dominance’s resilience has been impressive. The question being, does it signify that altcoins, as a group, were not just a flash in the pan? Or, alternatively, that a massive amount of “irrational exuberance” remains in the crypto sector, that needs to be purged?
No one has been more “Bitcoin Maximalist” than myself – and I continue to be, in terms of my personal investment, and recommendations to others. However, my observation of these trends has convinced me that altcoins are here to stay.
I still believe the vast majority of alts will fail as investments; whilst some will fail altogether. However, in a sector this potentially vast – where literally, tens of trillions of dollars of capital could enter in the coming years; to believe Bitcoin will be the ONLY cryptocurrency to survive seems naïve. Particularly, as I don’t even view altcoins as crypto CURRENCIES – but instead, crypto ASSETS to be speculated on, akin to ultra-high-risk technology stocks. Those with viable use cases; and strong network security; have a chance to succeed. However, like the dotcoms, most will lack at least one of these criteria…and many, both. To that end, I have written extensively about all of these issues, in real-time, at CryptoGoldCentral.com.
Which brings us to today; when, after what looked to be the start of a new FOMO phase, we appear to be back in “crypto limbo” – where prices continue to churn back and forth, in low liquidity markets, as the overhang of the recent, epic boom and bust cycle lingers on. Prices are much higher than when it started…however, as noted above, as many people believe we are about to crash as those who believe the next moonshot is imminent.
Meanwhile, in the world of reality, Bitcoin technological advancement continues to rise – as evidenced by SegWit reaching a new high in adoption; expansion of the Lightning Network; rollout of RSK; development of decentralized exchanges; and a host of other new potentially game-changing projects. Trading volumes are down; but hash rate is up; new miners are entering the market each day; and even at these “depressed” levels, $128 billion of capital is being used to store value in Bitcoin.
https://twitter.com/ArminVanBitcoin/status/999847757019074560
Conversely, altcoins are in most cases, being exposed for having no use case worth other than speculation. Which in several cases – like BGold and Verge – has enabled hackers to exploit them. The reason being, that as miners leave due to the lower profitability alts generate at low prices, the lack of mining depth; and in many cases, network security; leaves their networks vulnerable.
Among cryptocurrencies, only Bitcoin is immune to this trend – given the immense size and diversification of its mining and development community. Many would say Ethereum is, too. However, Ethereum – again, the FAR largest contributor to altcoin dominance - has major issues of its own…like its network growing too fast for what it was built to handle.
So, the $64,000 question, of where Bitcoin dominance is headed – which frankly, is anyone’s guess. In my view, if the current sector limbo resolves favorably – which is the side I lean towards – altcoin FOMO will return with a flourish. Yes, there will be more discernment amongst investors once burned. However, if Bitcoin is going to completely dominate the world, I doubt that conclusion will be made by the investment community any time soon – as there is simply too much capital arriving, and too many ideas to be tested.
Conversely, if prices start tumbling anew, a capitulation could occur in altcoins that would further dilute their mining pools – and thus, expose their flaws far more publicly, and broadly, than before…in which case, Bitcoin dominance could surge to 50, 60, or even 70%.
The reason I’m pondering this issue is to highlight altcoins extremely high risk/reward profile, relative to Bitcoin. Even Ethereum’s risk profile is dramatically higher than Bitcoin’s – particularly if it is indeed on the cusp of its own “scaling debate.” And everything else, literally off the chart.
Only you know what your optimum risk/reward profile looks like – but as for me, and anyone who asks me, I’m sticking with Bitcoin…particularly in such an uncertain investment environment. Then again, I’ll likely stick with Bitcoin in more “certain” environments, too.
Perhaps you can float the idea of creating a gold or silver backed altcoin to your friends at Miles Franklin?