Bitcoin starts to reassert its dominance in crypto space
Information about Bitcoin starts to reassert its dominance in crypto space
A useful statistic for measuring where we are in the broader crypto cycle is bitcoin dominance. In other words, what percentage of total crypto market value is made up of bitcoin?
When bitcoin (BTC) was launched more than a decade ago, it was the only crypto available, so its market dominance in the crypto space was 100%.
Then so-called altcoins like Ethereum (ETH), Litecoin (LTC) and Cardano (ADA) started to chip away at BTC’s dominance.
Up to 2017, bitcoin accounted for around 90-95% of all crypto market cap, but that changed suddenly in the early part of 2017 as bitcoin dominance fell from 95% to below 55% by September. By late 2017 bitcoin had reasserted its dominance, shooting back up to 70% of total market capitalisation. A few weeks ago, bitcoin’s dominance was at 40%, but it has since started to reverse and is headed back towards 50%.
To help us understand crypto money flows and how we can use this understanding to make better investment decisions, we posed the following questions to Brett Hope Robertson (BHR), investment analyst at crypto investment platform Revix.
Explain how bitcoin dominance works and what it tells us about money flows in the crypto market.
BHR: Though cryptos are relatively new in the investment landscape, there is an observable pattern of money flows that accompanies any crypto cycle.
In its most basic form, the money flow in crypto goes something like this: Money flows from the least risky asset to the most. So basically from fiat all the way down to small-cap altcoins. Remember, altcoins are just any other crypto coins that aren’t bitcoin.
It starts with investors buying Bitcoin with their fiat currency. As the Bitcoin price starts to rise, many more feel that crypto is a good investment and want to get in. Due to the fact that Bitcoin is the biggest and most respected cryptocurrency, many use it as the gateway into the world of crypto. We have seen time and again, as bitcoin’s price moves higher, new market entrants jump on board, pushing the bitcoin price even higher while seemingly leaving the altcoins behind.
When substantial profits have been made and the bitcoin price rally starts to cool off, which can be weeks or months, many smart investors start moving their bitcoin profits into large-cap altcoins, such as Ethereum or Polkadot. When they switch, we see this flow of money coming into these altcoins, and thus, the price starts to rise. This flow repeats all the way down to small-cap altcoins before returning to Bitcoin.
Now, I know you might be wondering … how does this affect bitcoin dominance?
Well, when money flows into bitcoin rather than the altcoins, we see the price of bitcoin outperform the price of the altcoins. Therefore, bitcoin dominance goes up. The opposite is true for when these funds flow out of bitcoin and into the altcoins, bitcoin dominance decreases.
Right now, we see bitcoin rallying in price while altcoins are languishing or declining. This is the typical early phase of what looks to be a classic money flow cycle.
You called this several weeks back, when bitcoin’s dominance dropped to 40%. You expected bitcoin to rally ahead of altcoin, and that’s exactly what happened. Was this because of an understanding of how this cycle works?
BHR: Yes, because we had a phase in mid-September where every altcoin with a pulse was moving up – and moving up a lot; this is a typical sign that we are coming to the end of what we call an ‘alt season’, where altcoins are rallying and leaving bitcoin behind.
When this happens, we see a sharp decline in bitcoin dominance, and September was no different. Bitcoin dominance came down to 40% from 73% in January. That trend has been repeated several times in years past, and as altcoins stopped appreciating in value, it was inevitable that bitcoin would reassert its dominance. It is still below 50%, but I expect it to rise some more over the next while, at which point altcoins will take over the reins again.
Why is bitcoin appreciating at the moment relative to altcoins?
BHR: There are multiple reasons.
One of the big drivers of price is the news out of the US that a bitcoin futures exchange-traded fund (ETF) could be approved within the next few months. This would be a major development in the crypto space as it will allow large institutional investors to gain exposure to this relatively new asset class in a regulated setting, and without having to worry about issues such as custody and security.
Big institutional investors have been waiting for a regulated way to gain exposure to bitcoin for a while. Research has shown that a relatively small investment of say 1% or 5% in a portfolio has historically had an outsized effect on overall portfolio performance.
Also, after the China crackdown news, bitcoin was traded down to very low levels given that its on-chain data was very bullish. Therefore, as traders would say, it was oversold.
Furthermore, concerns over high inflation in the US is perhaps the next most significant driver behind Bitcoin’s price rally. Having already proven itself as a viable inflation hedge, the influx of investors looking to protect their portfolios from snowballing inflation is unsurprising.
The rate at which bitcoin is mined reduces by half every four years. This halving event restricts supply, reduces the inflation rate of bitcoin and is also a major factor in the bitcoin cycle, is it not? Where do we sit in the current four-year halving cycle?
BHR: The last halving occurred in May 2020, and you are right that this has historically been a major factor in the bitcoin market cycle. Quite a lot of research has been done on this and it has been found that bitcoin peaks within 1.5 years of a halving, though there is some evidence to suggest that the halving cycle is less pronounced now than it was in the past. I think institutional interest in bitcoin and broader market adoption will become far bigger forces driving the bitcoin price over the next 10 years.
Revix brings simplicity, trust and great customer service to investing. Their easy to use online platform enables anyone to securely own the world’s top investments in just a few clicks.
Revix guides new clients through the sign-up process to their first deposit and first investment. Once set up, most customers manage their own portfolio but can access support from the Revix team at any time.
For more information, please visit www.revix.com
This article is intended for informational purposes only. The views expressed are not and should not be construed as investment advice or recommendations. This article is not an offer, nor the solicitation of an offer, to buy or sell any of the assets or securities mentioned herein. You should not invest more than you can afford to lose, and before investing, please take into consideration your level of experience, investment objectives and seek independent financial advice if necessary.
Brought to you by Revix.
Moneyweb does not endorse any product or service being advertised in sponsored articles on our platform.