Heavy is the head that wears the crown
Views expressed in the article below are the personal views of the author and should not form the basis for making investment decisions, nor be construed as a recommendation or advice to engage in investment transactions.
Bitcoin continued its rejuvenation this week, solidifying $53k support before mounting a rally above $57K. As bulls continue to lead the charge toward new all-time highs (ATH), it seems poised for a fruitful Q4. In the midst of BTC’s thunderous run, one might be forgiven for forgetting that it is but one facet of a thriving and incredibly diverse crypto industry.
Bitcoin began October occupying a 41% share of crypto’s total market cap, which currently stands above $2,4T. Its rapid ascension over the past two weeks has seen its dominance grow to 45%, with altcoins being forced to play catch-up. On the back of Wednesday’s news that inflation rates in the US have risen to a staggering 5,4%, crypto and gold have surged as asset classes, with alts finally enjoying some of the gains seen by BTC holders in recent weeks.
Why the delayed fuse?
Despite being the most volatile major asset class of the past decade, the crypto market has moved in surprisingly predictable cycles since its inception. The dynamics of these cycles are evident in previous bull runs, with BTC racking up exponential gains before igniting parabolic runs for smaller projects. Beneath the layers of complexity and jargon in the space, lie two simple motivators that drive any speculative market, and indeed the bulk of human decision-making: fear and greed.
In fearful times, investors look to protect their assets and de-risk, moving funds to “safer” classes as they seek to protect capital. Conversely, during times of heightened greed, investors are heavily influenced by euphoria permeating the market – and are likelier to allocate funds to higher-risk projects in the hopes of profiting from a far higher potential return on investment (ROI).
As we witnessed in late 2017, and again through the course of 2021, crypto is by no means exempt from these psychological drivers. In both instances, BTC has delivered new ATH’s before alts enjoying parabolic upward momentum.
BTC:USD, TOTAL2 (Tradingview.com)
In the chart above, we see the market cap of all cryptos excluding BTC (TOTAL2) superimposed in orange on the BTC/USD weekly chart. Despite the entrance of new projects with unique use cases, it becomes evident that alts generally react to BTC sentiment a fair degree more dramatically than BTC itself. Both in January 2018 and May of this year, altcoins saw their most significant gains following BTC’s breach of ATHs. Importantly, during the bear cycle preceding this run, alts lost a large proportion of dominance as they saw far greater drawdowns than that of Bitcoin.
Is this time different?
Overarching market psychology is a difficult thing to overcome. Indeed, it can often be seen as a self-fulfilling prophecy, as investors across the board rely on analysis of the same historical data and on-chain metrics to direct their investment decisions. However, with the likes of ETH, SOL, DOT and BNB seeing increased use as crypto natives begin to seek utility in DeFi and NFT’s, it’s plausible that Bitcoin’s days of >60% market dominance could soon be behind us. At present, Ethereum alone claims close to 20% of crypto’s share, edging ever closer to a $500B valuation. With new retail market entrants feeling “late” to the BTC party, it's likely that a large proportion of new funds flowing into the market will be directed to alts rather than Bitcoin itself.
Analysing dominance, it’s also worth noting that ETH claimed a total of 22% at its January 2018 peak. This followed December 2017 lows of 11% when Bitcoin first made its ascension to the mainstream. Many will remember the fervour of $20k BTC that captured the public’s imagination in the previous bull run, and the euphoria of ETH and XRP’s rolling gains exceeding 100% daily.
Crypto Dominance, 2017 - present (Tradingview.com)
At present, it seems there is little besides the threat of regulations standing in the way of BTC’s continued ascension, having claimed $57k support in a show of undisputable strength. With Stock-to-Flow holding steadfast on the path to $100k+, we could likely still see BTC drain investment from alts in the short-term as it climbs its way back into price discovery. However, with the sheer volume of everyday transactions and activity occurring on other chains, what lies before us could be seen as a new kind of race – do crypto natives still champion a dominant store of value above all else, or has the time come for novel Web 3.0 protocols to claim a throne in Bitcoin’s lonely pantheon?
Patience is a virtue