important point

  • Bitcoin Dominance measures the ratio of Bitcoin market capitalization to the cumulative market capitalization of the cryptocurrency sector.
  • It is now at 58%, the highest level since April 2021.
  • Market dynamics are changing as financial institutions look at Bitcoin, but the rest of the cryptocurrency markets are still struggling in a tough monetary policy environment.
  • Bitcoin appears to be carving out its own niche while regulatory crackdown declares many tokens as securities

The Bitcoin market is never boring.

That said, 2023 won’t (at least for now) be disrupted on the scale we’ve seen in previous years. In 2022, as the world transitioned to tighter monetary policy, bitcoin plummeted as scandals such as the collapse of Terra and the stunning FTX deception came to light. This is in the aftermath of the 2020 and 2021 pandemics, with cryptocurrencies rapidly penetrating mainstream consciousness, Bitcoin bringing dizzying profits, and the world wondering what this mysterious internet money is. inspired a conversation at the dinner table.

So 2023 can’t match the scale of that drama. However, there is something very interesting going on with Bitcoin’s market dynamics, at least compared to other cryptocurrencies. Bitcoin Dominance, which shows the ratio of Bitcoin market capitalization to the cumulative market capitalization of all cryptocurrencies, is 52%, the highest level in more than two years. In other words, Bitcoin accounts for 52% of the current $1.18 trillion cryptocurrency market capitalization.

Dominance diminished in 2020 and 2021

The chart above shows that Bitcoin started 2020 with a dominance of around 70%. Over the course of his next 365 days, the stock fluctuated a bit, tumbled back to the high $50s. However, Bitcoin really started to move in the final quarter of 2020, rising from $10,000 to $28,000. During this period, his dominance increased from 59% to 70%, finishing at about the same level as he started the year 12 months ago.

In 2021, altcoins will catch up. Bitcoin’s dominance plummeted like a stone, falling faster than ever before. The broader cryptocurrency market exploded as economic stimulus checks, lockdown Robinhood deals, and basement-level interest rates poured capital into everything remotely connected to the blockchain.

Cryptocurrency market cap will reach $3 trillion in November 2021, while Bitcoin market cap peaked at $1.28 trillion. Bitcoin’s dominance thus dropped to 43%. But the worst inflation crisis since the 1970s has sent central banks into the fastest rate hike cycle in recent memory after years of zero (and sometimes negative) interest rates.

For risk assets, this created a problem. And arguably, the cryptocurrency market as a whole is well outside the realm of risk. Capital has flowed out of space as interest rates continue to rise, inflation heats up further and several nefarious scandals hit the cryptocurrency sector (Do Kwon, Sam Bankman Freed , see Mr. Alex Mashinsky).

That brings us to now. Inflation peaked in the fourth quarter of last year, but the macro environment remains uncertain. Jobs are tight, the economy is still hot, and inflation is falling, but well below the Federal Reserve’s 2% target. In Europe, inflation is even more intense (I don’t even need to ask about the UK if it can still be called Europe).

But something is changing with cryptocurrencies. Bitcoin seems to be on the upswing again as its dominance increases. It is now at 58%, the highest since April 2021. On the one hand, this is a typical phenomenon that we have seen in the past: after a long period of tectonic change (2022), funds start to flow into Bitcoin, and eventually altcoins gain the upper hand. It gets filtered and rises before the rest of the market catches up.

However, there are two points of contention as to why this time might be different, and those who assume altcoins will continue this time may have a little more to think about. First, of course, past cycles are not indicative of future cycles, and this is especially true for Bitcoin.

The asset was only established in 2009 and has only traded in the last five years with any reasonable liquidity (although still thin). So it would be silly to put too much emphasis on the past few years, especially given that its entire existence up until last year was coinciding with the notable bull market across the economy. This was the first rodeo for Bitcoin, and cryptocurrencies, in a high interest rate environment, and all bets were off.

But apart from that blindingly obvious warning, there could have been a structural shift regarding the market in the past six months, or something that could have changed the prevailing trend going forward. There is further evidence suggestive of sex. I’m referring to regulation and, more recently, institutional movements.

The regulatory crackdown in the US has been brutal for the cryptocurrency sector, with many tokens including Solana, Polygon, Cosmos, BNB and Cardano recently being approved as securities by the SEC. Bitcoin, on the other hand, seems to be carving out its own niche. Or, as Coinbase CEO Brian Armstrong said when discussing the SEC’s lawsuit against his exchange, “We have been told by the SEC that, in fact, anything other than Bitcoin is a security.” I have received information that

It therefore feels foolish to declare this rise in dominance over the past few months to be temporary. Rather, it seems that Ether, the largest non-Bitcoin token, has so far evaded the dreaded security label, even though many of this regulatory issues may have already been factored in. , it is surprising that prices have not risen further.

But there are also realities that have been happening institutionally in recent weeks. BlackRock and Fidelity, the world’s largest asset managers, have both applied for spot ETFs. These are Bitcoin ETFs, not crypto ETFs.

In a sector where regulation is so vague and the intimidation of actually buying physical bitcoin is so high (no matter how tempting the promise of self-custody may be, wallets and seed phrases are a new user and The reality is that it is not ideal for institutional investors ) ), and this can have a staggering effect on liquidity. This is one of the major factors currently holding back Bitcoin’s movement. It may also allay concerns about the lack of transparency and credibility of centralized exchanges. Because financial institutions can bypass entities like Binance and go straight to the (regulated) Bitcoin ETF. Of course, these ETFs are not yet approved, but they are much closer to Bitcoin ETFs than other types of crypto ETFs.

The macro picture remains uncertain. Inflation may have peaked but is still rising, and with monetary policy notoriously slow to operate, the full pain of Fed rates above 5% has yet to be felt. Many challenges remain. While the regulatory crackdown could get even worse, who knows what goes on behind the scenes at some of these crypto companies. But while things are bad for cryptocurrencies, there is no denying that Bitcoin has head and shoulders above the rest of the group.

Considering all this, the rise in dominance makes sense. I don’t know what happens next (after all, crypto will be crypto), there is certainly nothing that would convince us that Bitcoin’s dominance, currently at a two-year high, must inevitably recede anytime soon.

By Jules

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