Hi all!
As bitcoin consolidates its market position, focus is shifting to the bitcoin dominance rate and its steady rise. In THE BRIEFING below, I talk about what this could mean for the market, and some hidden risks.
Elsewhere, crypto conversations are getting seriously interesting as the debate around bitcoin’s role in the broader investment landscape heats up. Is it a store of value? Several pieces out recently tackle this issue from various angles.
Things are also heating up on the regulatory front, with a couple of cases worth watching for the impact they may have on definitions and expectations, and with governments clamping down on the use of crypto for money laundering and tax evasion.
Speaking of heating up, I hope you’re enjoying a refreshing summer. Do try to recharge – I have a feeling we’re heading into an intense autumn.
Read on...
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Bitcoin dominance: is there such a thing as too much attention?
Everything flourishes with a bit of attention – even attention itself. You may have heard some rumblings recently about the bitcoin dominance rate. This measures the weight of bitcoin in the crypto universe, by taking its market cap as a percentage of the total market cap for crypto assets.
Traders and investors keep an eye on it as an indicator of market preference. It should surprise no-one that bitcoin is the dominant crypto asset, given its long track record and mainstream media attention. What is setting off alarms is its recent ascent: it is now hovering around 70%, a level not seen since April 2017, just before the previous bull market took off.
 (source: CoinMarketCap.com)
Some speculate that this means another bull run is imminent, one that will push bitcoin’s dominance to above 90% and effectively kill off any alternative crypto asset’s hopes of capturing significant market share.
Others see it as a sign that alternative crypto assets are on the verge of a recovery as investors pivot in search of outperformance.
As with any data point, there is much open to interpretation. Chart analysis aside, market metrics are rarely useful in isolation, and to get a feel for what the bitcoin dominance rate is telling us, we need a deeper understanding of what it represents – and why a rising number is not necessarily good news.
So what?
Why is the bitcoin dominance rate worth paying attention to? Surely everyone knows bitcoin is the leader?
Because it’s a relative measure that points to preference, conviction and momentum.
Price measures bitcoin’s popularity. Dominance measures its popularity relative to other crypto assets. In theory this could mean a “flight to quality” as investors get spooked by market risk and switch out of smaller cap tokens into a “safer” asset. Or, it could represent growing interest in the sector as a whole, along with conviction that bitcoin has the strongest fundamentals. Either way, it highlights that, of all crypto assets, bitcoin is the most attractive from an investor’s viewpoint. (It’s important to note that dominance can increase as the price goes down, and decrease as the price goes up – it’s a relative, not absolute, measure.)
This matters for several reasons, one of which is what it says about market sentiment. While bitcoin is a speculative asset, it can be considered less speculative than smaller cap tokens, given its relative liquidity, history and network size. Its growing dominance points to a focus on fundamentals and on relative “safety,” which depicts a more grounded level of investor participation than in the ICO-fueled boom of 2017.
While not necessarily predictive, sentiment indicators tend to be recursive – you can’t be sure the trend will continue, let alone with what energy, but positive sentiment generally has an in-built inertia. If traders choose to buy based on these indicators, they reinforce them, which encourages more traders to buy, and so on.
Another important consequence is market confidence, especially at the early stages of institutional involvement.
Large traditional funds are not, on the whole, particularly concerned with the relative merits of one token versus another. They are more likely to be evaluating whether to invest in crypto or some other speculative asset class as part of their portfolio diversification. For most, if they choose to invest in the sector, bitcoin is the only viable option: it’s the only one that 1) has sufficient liquidity to absorb a small- to medium-sized allocation; 2) has a lively derivatives market; 3) can count on a wide range of on-ramps and 4) is definitely not an unregistered security in most jurisdictions.
The protagonist role of bitcoin is likely to increase the confidence of traditional investors in the sector overall, burnishing its reputation and making their decision easier. In the absence of concrete valuations (difficult with bitcoin using traditional methods, since it has no cash flows), sentiment is usually as good a market indicator as any.
Now what?
No trend continues forever, though. Previous run-ups in the dominance factor have been met with a correction as investor attention pivots and new alternatives come into play. In spite of momentum, in virtually all asset classes there comes a reckoning, in which market leaders become overvalued relative to the runners-up, and knowledgeable investors take profits in order to re-invest in more attractive opportunities.
But this is unlikely to happen in the short term, even though the last bull market saw bitcoin’s dominance drop from over 85% to below 40%. This time it is different.
Why? Last time the latter stage of the bull market was largely driven by the hyped potential of initial coin offerings, many of which promised revolution and riches based on marketing documents masquerading as white papers. The retail market poured into speculative tokens, which ramped up their value relative to the more “boring” bitcoin – at one stage, it looked like ether was going to push bitcoin off its market leader pedestal.
Recent market activity, however, has felt much more subdued (in spite of occasional shenanigans), largely due to increased regulatory scrutiny. The “sobering up” of the bear market, during which lawmakers and enforcers got to grips with the potential and threat of this new asset class, entrenched more rigorous standards for token issuers, promoters and investors. Many of the tokens issued in 2017 are now defunct, and while other interesting opportunities have emerged, the flow is more careful and calculated.
What’s more, the expected role of institutional investors in the next bull run, with their focus on bitcoin as the representative crypto asset, is likely to push bitcoin’s dominance up even further.
Then what?
What will it take for that to change?
All trends do eventually tire, to be replaced by new, more energetic ones. The same will happen with bitcoin. Once bitcoin investment by institutions is not such a novelty, and once deeper liquidity has dampened volatility, aggressive managers eager to beat their peers’ performance are going to start thinking about where to find alpha.
That’s when they start to look at other assets. They may rotate out of bitcoin into more overlooked alternatives; or they may put in fresh money. Either way, the relative weighting of other crypto assets will increase.
This is unlikely to happen any time soon, though. Institutional involvement is just getting started and has a long way to run. Current currency turmoil and macro uncertainty may accelerate this, but a more likely scenario is that the bulk of institutional money, which tends to be relatively conservative, will wait for signs of further momentum before risking their reputations and returns.
The risk
Meanwhile, growing bitcoin dominance presents a risk we should not overlook: that bitcoin becomes firmly entrenched as the go-to crypto asset for the bulk of crypto investment, to the extent that it smothers interest in other ideas.
This would not be good for the sector, for two main reasons.
One, it would suck funding out of other areas of the market and stifle development of blockchain applications. Blockchain technology’s potential goes beyond bitcoin; it presents the opportunity to re-think how business models work, how assets can be valued and how income and capital can be distributed in a more decentralized economy. Other crypto assets are manifestations of this potential, and should be able to approach the market for funding and validation.
Two, concentration is a sign of an immature asset class. Imagine an emerging stock market in which one company accounts for 80% of the country’s market valuation. A diversified category will be more resilient, flexible and powerful, as internal connections and synergies empower a profitable irrigation of resources.
We are entering a phase where more attention will be paid to the dominance metric, which is likely to continue creeping up for some time. Some analysts are suggesting alternative calculations, taking out “fake volumes” and even stablecoins (since they are not seen as a competing investment vehicle) – a re-adjusted figure could be as high as 90%.
Could we get to a “tipping point” beyond which diverting attention from bitcoin will be extremely difficult?
It’s possible, but unlikely. People generally want to differentiate themselves from others; that also applies to their investment portfolios. Not only will investments in not-so-high-profile tokens better reflect retail investors’ personal preferences; but professional competition will also encourage crypto diversification in a search for outperformance.
Bitcoin’s dominance will probably continue to be unassailable for at least a few more cycles, though, and the inflow of funds, even if concentrated, will help the market infrastructure continue to mature. But, in the end, creativity and innovation always find a way to manifest.
Meanwhile, we should celebrate that bitcoin has not only survived but thrived. Its growing dominance and rising liquidity are signs that a greater number of investors believe in its potential. However, as exciting as that may be, it’s not the only thing going on. As investors, we also need to keep an eye on what’s happening out of the limelight; from there will emerge the interesting opportunities of tomorrow.
– Noelle Acheson
(Disclosure: I hold a modest amount of bitcoin with no short positions.)
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* six especially interesting entries in case you can't read/watch them all, which is understandable but you might be missing out on stuff
BIG IDEAS
*Bitcoin Is Not Too Volatile (Unchained Capital) – Why bitcoin is volatile (for now), and why that is a good thing.
*Monthly Bitcoin Outlook July 2019 (Delphi Digital) – An overview of July’s bitcoin metrics, and what they say about the state of the network.
*Hedging US-China Trade Risk with Bitcoin (Grayscale Investments) – Why bitcoin deserves a strategic position in diversified long-term portfolios: it’s the liquidity risk.
Bitcoin as a Leading Global Hedge (SFOX) – Of all the major cryptocurrencies, bitcoin is the one with the highest negative 30-day correlation with the S&P 500.
Bitcoin and Gold Are Monuments To Irrationality (Bloomberg, paywall) – Are bitcoin and gold “stores of value”? The evidence doesn’t add up.
Justin Moon (@_JustinMoon_) also questioned the established narrative of bitcoin as a “store of value,” and presented an intriguing alternative.
*Bitcoin , Gold, and The Future of Macro Investing (Real Vision Finance, video) – An engrossing chat between Raoul Pal and Dan Tapiero, founder of DTAP Capital and co-founder of Gold Bullion International, about the surprising origins of bitcoin, why it is so difficult for traditional investors to get their head around (comparing it to gold is not the answer), and how to approach bitcoin valuation.
Trump’s Currency War With China Could Be Bitcoin’s Do-or-Die Moment (CoinDesk) – Michael Casey argues that the current trade and currency tensions shine a light on bitcoin’s potential; if not now, then when?
Derivatives Drama: The Unintended Consequences of Crypto Regulation (CoinDesk) – The LedgerX confusion highlights how regulatory priorities can shape markets.
Ari Paul (@AriDavidPaul) and Dave Weisberger (@daveweisberger) comment on the effect of the macro economy on bitcoin price performance.
Dovey Wan (@DoveyWan) debunks the story that bitcoin is going up because of Chinese buying.
Crypto Code Commits Remain Near All-Time Highs, Despite Price Declines (CoinDesk) – A strong signal that the next bull run will be longer-lasting, as the bear market building starts to bear fruit.
MARKETS
Goldman Sachs Analysts’ Note Says Now’s a Good Time to Buy Bitcoin (CoinDesk) – A technical analysis note predicts a short-term target of $13,971.
*Blockforce Capital July Digital Asset Commentary (Blockforce) – An overview of market movements, with an interesting perspective on bitcoin volatility.
Bitcoin Is Dancing in Tandem With Gold Again (Bloomberg, paywall) – Global market uncertainty seems to increase the correlation between the two supposed “safe haven” assets.
In Wild Crypto Week, Bitcoin Gains and Grabs Bigger Market Share (Bloomberg, paywall) – Bitcoin now makes up almost three quarters of the crypto universe (see also THE BRIEFING).
Bitcoin’s reported market dominance is approaching 70%, but in reality it is above 90% (Kryptografen) – An alternative look at bitcoin’s market dominance (see also THE BRIEFING).
Institutional investors are powering Bitcoin’s bull run, says new report (Decrypt) – The report from asset manager CoinShares points out that the bitcoin run-up so far is different from the last one, in its relative lack of media attention and search engine spikes.
Binance’s US Subsidiary Is Weighing 30 Different Cryptos For Listing (CoinDesk) – A timetable for launch of the U.S.-based exchange has not yet been set, however.
Coinbase UK Dropping Support for Cryptocurrency Zcash (CoinDesk) – Speculation is now swirling as to why.
Gemini Exchange Data Is Being Added to CME’s Crypto Indices (CoinDesk) – The CME CF Bitcoin Reference Rate, CF Bitcoin Real Time Index, CF Ether-Dollar Reference Rate and Ether-Dollar Real Time Index.are offered by CF Benchmarks (formerly Crypto Facilities).
PROFILES
Binance’s CZ: Like It or Not, Facebook’s Libra Coin Is Poised for Mass Adoption (CoinDesk) – Ian Allison sat down with the CEO of crypto exchange Binance for a wide-ranging chat about Brexit, Libra, crypto insurance and much more.
The Diverse Offerings for Access to Digital Assets (ErisX) – An update on crypto exchange ErisX’s products and roadmap.
LedgerX in Race Despite Stumble (TabbFORUM, video) – Russell Rhoads talks about LedgerX’s derivatives offering, and suggests that the race to launch physically-delivered futures is still open.
Who’s behind this? (Etienne Bru) – An interview with Graham Rodford of London-based digital asset exchange Archax.
CRUNCHING NUMBERS
*Explaining the Current Bitcoin Rally Using Blockchain Data (Jesus Rodriguez) – Some numbers and charts behind recent bitcoin movements that show that most of the buying was not coming from China, as many assumed.
Contextualized Analysis of Bitcoin Drawdowns (Galaxy Digital Research) – An analysis of bitcoin’s historical drawdowns, and the implications for the timing of market cycles.
REGULATORS AT WORK
SEC Delays Decisions on 3 Bitcoin ETF Proposals (CoinDesk) – The next deadlines for the Wilshire Pheonix proposal is September 29; the final decisions on the Bitwise and VanEck/SolidX proposals are due on October 13 and 18, respectively.
ECB Says It Plans to Use More On-Chain Data to Monitor Crypto Assets (CoinDesk) – A growing trend of regulators hiring blockchain analysts.
British Authorities Seek Data from Crypto Exchanges in Search of Tax Evaders (CoinDesk) – Authorities around the world seem to be getting serious about this, even though few have established tax guidelines for crypto profits.
Coinbase Must Face Negligence Suit Over Bitcoin Cash Listing, Judge Rules (CoinDesk) – This case could help define an exchange’s “duty” to the market.
Kik Says SEC Lawsuit ‘Twisted Facts’ About Startup’s $100 Million Token Sale (CoinDesk) – This case is worth keeping an eye on as it could influence the U.S. regulator’s definition of security tokens going forward.
South Korean Watchdog Plans Direct Supervision of Crypto Exchanges (CoinDesk) – The Financial Intelligence Unit will directly regulate crypto trading platforms, which are currently monitored indirectly via the country’s banks.
Rhode Island Will Regulate Crypto Under Money Transmitter Laws (CoinDesk) – After January 1, 2020, ny business that accepts fees for currency transmissions, or maintains control over virtual currencies for others, will be required to comply with money transmitter regulations.
SECURITY TOKENS
tZERO to Open Security Token Market to Retail Traders Next Week (CoinDesk) – The platform went live for accredited investors in January, but on August 12, when the one-year lock-up period for tZERO’s security token expires, retail investors will also be able to trade.
Korean Fintechs Are Creating a Blockchain for Trading OTC Securities (CoinDesk) – Six local participants are involved in the project, which could launch in late 2019: Koscom (an IT solutions company launched by the Ministry of Finance and the Korea Exchange), KEB Hana Bank, Hana Financial Investment, Daejeon Technopark, startup Amicus Lex and an association for accelerators.
STABLECOINS
Mohamed Fouda (@MohamedFFouda) highlights analysis that shows that most ethereum-based on-chain stablecoin volume comes from trading, not from payments.
PODCASTS
UNCONFIRMED: If you’ve been transfixed by the tennis match that is the Kik vs the SEC, you’ll enjoy this breakdown by lawyer Rebecca Rettig, partner at FisherBroyles, of the next steps and possible outcomes.
UNCHAINED: Laura Shin spoke to crypto laywer Jake Chervinsky, general counsel for crypto money markets firm Compound, who shared wome insight into how Washington works, the SEC-Kik duel and the likely outcome of Libra.
THE SCOOP: Frank Chaparro talked to Andy Bromberg, co-founder and president of token platform CoinList, about how project financing has evolved since the ICO craze, the lacklustre demand for security tokens, the role of auctions in price discovery, how the Libra launch could work out well, and much more.
THE FLIPPENING: A revealing interview by Clay Collins of Changpeng Zhao ("CZ"), CEO of crypto exchange Binance, in which he discusses growth strategies, sector priorities and the difficulties of running the world’s largest crypto exchange.
WHAT GRINDS MY GEARS: Meltem Demirors and Jill Carlson chatted about the Washington hearings, the legal status of bitcoin and whether or not it could effectively be controlled or banned.
A-HA!
The Nightmare of Disintermediation (Jill Carlson) – The idea of decentralization is seductive; but could bring increased risk and chaos. It’s happened before.
Alex Rampell (@arampell) points out that we shouldn’t just focus on the weaponisation of currencies – we should also be aware of the risk of weaponisation of payment methods.
Hedge Fund Managers With ‘Skin in the Game’ Outperform — But They’re Also Less Likely to Take Your Money (Institutional Investor) – “Insider money” tends to do better, but opportunities are limited; relevant to crypto investing via funds.
The Fate of the World’s Largest ETF Is Tied to 11 Random Millennials (Bloomberg, paywall) – An overly sensationalist headline, perhaps, but a kinda nuts story.
Three Years of Misery Inside Google, the Happiest Company in Tech (Wired, paywall) – An epic look into Google’s culture, which raises more questions than it answers.
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FUNDING
Cryptocurrency lending company BlockFi has secured an additional $18.3 million in venture capital funding led by Valar Ventures (founded in part by PayPal founder Peter Thiel) and participated in by Winklevoss Capital, Galaxy Digital, ConsenSys, Akuna Capital, Susquehanna, CMT Digital, Morgan Creek, Avon Ventures and PJC.
FIRMS
Binance, the world’s largest cryptocurrency exchange in terms of volume, now allows margin trading in litecoin, ethereum classic and the stablecoin USDC.
PEOPLE
Katherine Wu, previously Director of Business Development at crypto data firm Messari, has joined venture capital firm Notation Capital.
According to reports, Amir Zaidi – director of the CFTC’s Division of Market Oversight, and responsible for setting policy on bitcoin futures trading and redrafting the rules on OTC swaps markets – is leaving the regulator.
Have a tip? Drop me a line at noelle@coindesk.com. |
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| Whether you're based in San Francisco or Singapore, there is no escaping how big a role Asia plays in today's crypto markets. Whether it's the advent of exchange tokens, the importance of Asian OTC desks or the unusually clear-eyed regulatory regimes, there is a strong argument that, when it comes to crypto, in many ways East is leading West.
Our upcoming event in Singapore, Invest: Asia, is an exploration of the people and topics driving this market. CoinDesk is thrilled to be returning as a partner to TechXLR8 Asia by co-locating Invest: Asia with 5G Asia, IoT World Asia, NV&SDN, the AI Summit and Project Kairos Asia September 11-12, 2019 at the Marina Bay Sands Convention Center. With a dynamic expo floor, a special Asia edition of CoinDesk Live and plenty of networking opportunities, Invest: Asia will further explore how crypto markets function and impact the world at large.
You can see our evolving agenda here.
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CoinDesk is not an investment advisor. This newsletter is for informational purposes only, and any comments here do not constitute investment advice. |
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Institutional Crypto - Bitcoin dominance: is there such a thing as too much attention?