Noelle Acheson is a veteran of the company's analytical field and a research director at CoinDesk. The opinions expressed in this article are all personal opinions of the author.
The following article was originally published on CoinDesk's Institutional Crypto, a free weekly newsletter focused on cryptographic assets.
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Everything thrives with a little bit of attention.
Recently you may have heard some reports about the rising proportion of the bitcoin market. The dominant degree of Bitcoin is to measure the weight of Bitcoin in the field of encryption by calculating the market value of Bitcoin as a percentage of the total market value of all encrypted assets. Traders and investors pay close attention to this indicator as an indicator of market preference.
Given Bitcoin’s long-standing record and mainstream media attention, it is the dominant encryption asset that should not surprise anyone. The recent rise in the index has sounded the alarm: the index is currently hovering around 70%, a level that has never been seen since the last bull market in April 2017.
Some speculate that this means another round of bull market is coming, this time will push the dominance of bitcoin to more than 90%, and effectively kill any competitors to win a considerable market share.
Others believe that this is a sign that the competition is on the verge of recovery as investors turn to better-performing crypto assets.
There are a lot of things to explain for any data point. Regardless of the chart analysis, a single market indicator is not so practical. To understand what bitcoin dominance means, we need to understand more deeply what it means, and why this rising percentage is not necessarily good news.
Why is the market value of BTC soaring to 70%?
Why is Bitcoin's market-leading ratio worthy of attention? Everyone knows that Bitcoin is the leader in the encryption world.
Because this is a relative measure that points to market preferences, beliefs, and motivation.
The price can measure the popularity of Bitcoin. Compared to other crypto assets, the market-leading ratio can also be measured by its popularity. In theory, this may mean that investors are “frustrated by high-quality assets” from small market capitalization tokens to “safer” assets due to market risk. Or, it may mean that people are increasingly interested in the entire bitcoin industry, and believe that Bitcoin has the strongest fundamentals.
In any case, this highlights that among all crypto assets, bitcoin is the most attractive from an investor's perspective. (It is important to note that the dominance can rise as prices fall, or as prices rise. Because this is a relative, not an absolute measure.)
This is important for several reasons, one of which is that it reflects market sentiment. Although Bitcoin is a speculative asset, considering its relative liquidity, development history and network size, it can be considered as speculative without the crypto assets with smaller market capitalization. The growing dominance of Bitcoin suggests that it focuses on fundamentals and is relatively “safe,” indicating that investor engagement is more stable than the WIPO-promoted 2017 boom.
Although not necessarily predictive, emotional indicators are often recursive—you can't be sure if this trend will continue, let alone what is driven, but positive emotions usually have inherent inertia. If traders choose to buy based on these metrics, they will strengthen these metrics to encourage more traders to buy, and so on.
Another important consequence is market confidence, especially in the early stages of institutional involvement.
In general, large traditional funds do not pay special attention to the relative value of one token relative to another. As part of their portfolio diversification, they are likely to assess whether they are investing in cryptocurrencies or other speculative asset classes. For most people, if they choose to invest in the encryption industry, Bitcoin is the only viable option for the following reasons:
1) It is the only currency that has sufficient liquidity to absorb small and medium-sized configurations;
2) have an active derivatives market;
3) can rely on a wide range of access ports;
4) In most jurisdictions, it is never considered to be unregistered securities.
In general, the leading role of Bitcoin may enhance the confidence of traditional investors in the industry, enhance their reputation and make it easier for them to make decisions. In the absence of specific valuation indicators (traditional methods are difficult to value Bitcoin because it has no cash flow), sentiment is usually a good market indicator.
Why is this different than the bull market promoted by ICO?
However, no trend will last forever.
As investors turned their attention, new alternatives began to play a role, and the previous rise in dominance was corrected. Despite the strong momentum, almost all asset classes will face a new round of liquidation, that is, the value of market leaders is overvalued relative to the second place, and knowledgeable investors will re-select more attractive investment opportunities. (competition currency market).
But this is unlikely to happen in the short term, although the previous bull market has witnessed the dominant position of Bitcoin falling from more than 85% to below 40%. This time is different.
Why? The latter stage of the last bull market was largely driven by the potential of ICO. With the marketing documents disguised as white papers, many ICO promises will bring revolution and wealth. The retail market is flooding with speculative tokens that have appreciated against the more “boring” bitcoin – Ethereum once seemed to push Bitcoin out of the throne of market leaders.
However, due to the increased regulatory review, recent market activity feels much weaker (although there are occasional pranks). During the bearish “awake” period, legislators and law enforcers set out to address the potential and threat of this new asset class, setting more stringent standards for token issuers, promoters and investors. Many of the tokens issued in 2017 are now dead, and although there are other interesting opportunities, the flow of funds is more cautious and cautious.
More importantly, the expected role of institutional investors in the next bull market and their focus on Bitcoin as a representative encryption asset may further push up Bitcoin's dominance.
What will happen next?
How can we change this situation?
All trends will eventually be replaced by new, more dynamic trends. The same is true for Bitcoin. Once an organization's investment in Bitcoin is no longer so fresh, once liquidity increases inhibit volatility, radical fund managers eager to surpass peer performance will begin to look for alternatives (competitive coins).
At this time they began to pay attention to other assets. They may move from bitcoin to more easily overlooked alternatives; or they can invest in new funds. Either way, the relative weight of other cryptographic assets will increase.
However, this situation is unlikely to happen in the short term.
Institutional involvement has just begun, and there is still a long way to go. Current currency volatility and macro uncertainty may accelerate the process, but it is more likely that relatively conservative institutional investors will wait for more signs of momentum and then take risks with their reputation and rewards. .
Is this really good?
At the same time, the growing dominance of Bitcoin has also brought a risk that we should not ignore: Bitcoin, as the preferred encryption asset for encryption investments, has become so ingrained that it has stifled interest in other ideas.
This is not good for the industry for two main reasons.
First, Bitcoin will absorb funds from other areas of the market and kill the development of blockchain applications. The potential of blockchain technology goes beyond Bitcoin; it provides the opportunity to rethink how business models work, how assets are valued, and how income and capital are distributed in a more decentralized economy. Other crypto assets are a manifestation of this potential and should be able to approach the market for financing and verification.
Second, centralization is a sign of the immature asset class. Imagine a company's market capitalization of 80% of the country's market value in an emerging stock market. Diversified categories will be more resilient, more flexible and more powerful, as internal linkages and synergies allow resources to be profitably irrigated.
We are entering a phase where more attention will be placed on the dominance measure, and bitcoin dominance is likely to continue to climb over time. Some analysts have proposed another method of calculation, which eliminates "false transaction volume" and even includes stable coins (because they are not considered a competitive investment tool), and the re-adjusted bitcoin may be as high as 90%.
Can we reach a "tipping point" beyond which it will be extremely difficult to divert attention from bitcoin?
This is possible, but not very likely. People generally want to distinguish themselves from others; this also applies to their portfolio. Investing in less well-known tokens not only better reflects the personal preferences of retail investors; but professional competition will also encourage diversification of cryptocurrencies to seek better performance.
However, the dominance of Bitcoin may remain unquestionable at least for the next few cycles, and the inflow of funds, even if concentrated, will help the market infrastructure continue to mature. But in the end, creativity and innovation will always find a way to embody.
At the same time, we should celebrate that Bitcoin has not only survived but has flourished. Its growing dominance and rising liquidity indicate that more and more investors believe in their potential. However, although this may be exciting, it is not the only thing.
As investors, we also need to focus on what happens outside the spotlight; from there there will be interesting investment opportunities.