The Breakdown - Why Is Bitcoin Dominance So Much Lower Than in Previous Bear Markets?

Starting point is 00:00:00 Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexo.io, Circle, and Cracken, and produced and distributed by CoinDesk. What's going on, guys? It is Sunday, December 11th, and that means it's time for Long Read Sunday. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper in a the conversation. Come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. All right guys, happy Sunday. Hope you're having a great weekend. And if you follow me on Twitter, you will be intimately familiar with this topic if you've been watching it all

Starting point is 00:00:51 this week. Today, we are talking about Bitcoin dominance. And I think there are good questions and debates to be had about whether it's a relevant measure at all. But it is something that people have been talking about for a long time, and we're in a moment right now where everyone is trying to look to historical analogy to try to get a sense of what might come next, what's different this time, et cetera, et cetera, et cetera. So where we're going to start is with a piece published on Coin Desk by Noel Atchison, who used to be the former head of research at CoinDesk in Genesis, and now has a newsletter called Crypto is Macro now. The piece is called Bitcoin Dominance is behaving weirdly, and that's sort of good. And what we're going to do is we're going to

Starting point is 00:01:31 read this piece first and then we're going to discuss the follow-up thread that happened on my Twitter feed earlier this week. Bitcoin dominance is behaving weirdly and that's sort of good. It's likely we are witnessing the consolidation of the crypto market's speculative nature. In the current whirlwind of dismay and disappointment, or should I say, shock and shame, many in the Bitcoin ecosystem are no doubt fondly remembering simple times when the Bitcoin currency crashing was all we had to stress about. In 2011, Bitcoin's drawdown and reached 93%, a market cap loss of 172 million. The 2014-2015 Crypto Winter saw Bitcoin market cap lose over 80%, wiping out 11.3 billion of value. Sigh, those were the days. Obviously, I'm not serious.

Starting point is 00:02:16 That time was, no doubt, shockingly painful for anyone in the industry back then. The Mount Gawks implosion at one stage felt existential. Sure, the Bitcoin blockchain would continue to exist after the largest exchange turned out to be engaged in fraud, but would anyone care? The Fallout, however, limited to a relatively small circle of libertarians, cryptographic experimenters, and the techno-curious. It was barely covered in the mainstream press. This turned out to be a blessing because the bruised could get to work rebuilding, out of the glare of mainstream attention. The contrast with today's market could not be more stark, because the world has been flooded with a torrent of headlines covering every possible angle of the FTX exchanges implosion.

Starting point is 00:02:53 Wednesday's Andrew Ross Sorkin's Sam Bankman-Fried interview at the New York Times Dealbook Summit was viewed by probably hundreds of thousands, if not millions of people. The extent of the fallout is as yet unknown. There is serious talk about how it might impact traditional finance, and skeptics feel they should be involved in shaping what the reconstruction might look like. The damage has hit thousands of assets costing almost $160 billion in market cap. Back in 2011 to 2015, Bitcoin was the whole market. Now that is far from the case.

Starting point is 00:03:22 This is unreservedly good. The range of technological spinoffs and evolving use cases has probably surprised even the most optimistic of the early adopters. The rapid spread of interest and adoption has grown the value of the entire market. It is also through diversification reduced overall market risk. This last assertion may sound out of place, given the implosion the industry has just witnessed. But it has been an industry implosion much more than a market implosion. The market still works.

Starting point is 00:03:46 Crypto assets, with a couple notable exceptions, are still doing what they do. Bitcoin still produces secure blocks. Ethereum still pays staking rewards. Decentralized finance tokens continue to incentivize platform participation. Value is still transferred on chain. The market infrastructure has changed, the market itself, not so much. We can see this in a key metric that serves as an indicator of sentiment, and that I subliminally introduced in the previous paragraphs, Bitcoin dominance.

Starting point is 00:04:11 This is simply the percentage of the total crypto market cap accounted for by Bitcoin, and is tracked through the BTC.D index. Up until the emergence of Ethereum in 2015, it was around 99%. A few smaller tokens had emerged, none of which had gained significant traction. Ethereum's early success triggered a Cambrian explosion of innovation. New tokens emerged at an astonishing pace and the initial coin-offering frenzy of 2017 pushed Bitcoin's dominance down to 37%. The drop coincided with a 470% increase in the overall crypto market cap in the span of approximately three months. This introduces a salient feature of Bitcoin's dominance, its role as a sentiment gauge. In times of

Starting point is 00:04:50 high speculation, such as in late 2017, BTC.D drops. BTC is the least volatile of the non-stable coin crypto assets, and when traders and short-term investors are feeling confident, they tend to prefer the high-risk, high reward offered by some of the smaller tokens. The 2018 crash and ensuing bare market reversed the trend. The speculative assets fell by much more than the relatively stable Bitcoin and its dominance climbed, reaching over 70% in August 2019. Then the market got confident again, new layer 1 blockchains attracted attention, and Bitcoin dominance it's headed down, reaching 58% a year later. We then saw an unusual phenomenon, a speculative market in which Bitcoin was a star performer. In August 2020, Micro Strategy announced its first major

Starting point is 00:05:30 Bitcoin purchase. In the following weeks, several other firms, funds, and millionaires revealed Bitcoin holdings. The institutions had arrived. In early 2021, Bitcoin corrected from its highs just as institutional and celebrity interest in other tokens started to take off, with a flurry of new funds, new listings, and new services. BTC.D dropped as lower-cap tokens took the spotlight, outshining Bitcoin's performance, even as it reached its all-time high of $69,000 on November 10th. The normally high 60-day correlation between Bitcoin and other tokens dropped sharply during this period. We're getting to the weird part. Bitcoin dominance spiked during this year's May-June market drama, along with a rotation into the relatively safe crypto asset,

Starting point is 00:06:10 although the metric remained below 50%. It then understandably declined as the dust settled. But it hasn't really moved since, even though there has been plenty of cause for fear. Over the month of November, as the FTX contagion ripped through the system, crypto's market cap lost 15%, yet Bitcoin dominance oscillated between 40.0% and 40.9%. It can't possibly be telling us that sentiment is flat. Has Bitcoin dominance lost its role as a sentiment gauge? That would imply that Bitcoin has lost its role as the safe crypto asset, or could there be something else going on? It's possible that Bitcoin has not outperformed other crypto assets because, rather than rotate into relative safety, investors have largely left the market. Bitcoin's spot volumes have dropped to

Starting point is 00:06:52 local lows after the panic spike earlier this month. But they are still above levels at the beginning of the year, while those for ether notably lower. This feels like an exit, but not a massive one. It's more likely we are witnessing the consolidation of the crypto market's speculative nature. This may sound alarming, as many of us now instinctively recoil at the thought of more speculation, after the damage done to portfolios and reputation by shady actors over the past year. We also flinched just imagining how regulators are sharpening their knives to excise heightened risk from the market. All of this is reasonable, as is the relief felt by builders and creators that the industry can focus on the constructive aspects of crypto potential now that risky froth has been washed out.

Starting point is 00:07:31 Only, it hasn't. We're seeing this not only in the flat BTC.D, but also in the performance of some smaller tokens. Over the past month, one of the worst for crypto in recent memory, Lightcoin, is up over 25%. OKX's token, OkB, is up more than 36%. The Binance ecosystem's wallet token, TWT, is up over 110%. And Defi Exchange's GMX token is up over 33%. This past week has produced scores of 10 plus percent jumps among medium-cap tokens, such as Dogecoin, Ave, and Uniswap, among others. The FTX implosion has not removed speculation, nor has macro uncertainty plus the broad withdrawal of liquidity from crypto and traditional markets. What will? Nothing. Speculation is here to stay. As much as some of us may wish it away, speculation is a feature of free

Starting point is 00:08:19 markets. It is also a feature of sophisticated ones, and we want crypto markets to be both. Speculators may be all about buying an asset and selling at a higher price, or selling an asset and buying lower if they're shorting, rather than actually contributing to a project's growth. But that is a key feature of markets, the freedom to buy and sell at prices we deem fair. Without the ability to express different opinions, markets become predictable and altogether uninteresting. They also become less useful. Speculators may contribute to volatility, but they also enhance price discovery by reflecting opinions weighted by capital, closing arbitrage gaps and providing exit liquidity. Speculation is not harmless. It can destabilize markets especially if done

Starting point is 00:08:55 with high leverage. But in most cases, the issue is more with the facilitating platforms than the trading behavior. Many critics point to the price distortions as evidence of speculative damage, conflating aggressive trading with market manipulation. In the confusing aftermath of the FTX implosion, even industry insiders are assuming that speculation, rather than a violation of trust, was at fault. And for many of us who are in this industry because of its potential to improve financial freedom and integrity, the desperate rush for returns feels, well, uncomfortably superficial. Speculation bashing may align with many core crypto values, and it does have a certain cathartic utility, but it is pointless. The strange behavior of Bitcoin dominance during the recent

Starting point is 00:09:32 turmoil tells us that the market composition has changed. Bitcoin is still the anchor asset by a wide margin, but the volatility of its protagonism is weakening. This is a sign of a maturing asset class, that this should become apparent during one of the industry's darkest times is cause for hope. In an ecosystem where innovation is the norm, it's the basics that are in the spotlight. Nexo is a company that has never put the safety of clients' funds in question. With over 50, global licenses, $775 million in insurance, and a real-time audit of custodial assets. Nexo sets an example for security standards in the industry. Apart from keeping their 5 million clients safe, Nexo has kept building.

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Starting point is 00:11:32 crackin.com slash breakdown to join. All right. So that is Noelle's take on things, and I think there's a lot to consider in there. However, I think that this question is super fascinating. And so I asked people on Twitter what their best explanation for why Bitcoin dominance isn't following its historic pattern of surging back at a time of stress. This turned into quite the discussion with about 200,000 impressions, hundreds of comments and a ton of debate. Looking back over all of it, I think that the answers fit in about five to six broad categories. The first is that Bitcoin dominance is a dumb metric to begin with.

Starting point is 00:12:17 And there are a lot of pieces of that, one of which I'll get into more specifically in just a minute. But one really interesting thought on that point came from Dan McArdle, who was on the show just a couple weeks ago. He wrote, I feel like crypto is now more than ever a bunch of increasingly independent verticals. that happen to share a technology ancestry and therefore get shoehorned together. In other words, Bitcoin doesn't compete with Ave any more than gold competes with Lending Club, and we wouldn't compare gold to Lending Club's stock price. This I certainly resonate with.

Starting point is 00:12:47 Even in 2018, there was still a smaller number of verticals. There were money-like tokens, there were utility tokens, whatever that ended up meaning, and then there was a lot of ICO nonsense. However, now there really are different investment theses for different assets. Now, of course, some of you may be only focused on one of those investment theses, and so think the other ones are stupid. But the point being is that someone who decides to invest in Bitcoin as a long-term store of value is different than someone who wants a highly performant programmable blockchain as a different approach to building games or Web3 services. And so the idea,

Starting point is 00:13:21 inherent in Bitcoin dominance, that all of these assets are likewise and can just be compared together, seems sort of fraught right from the beginning. However, there's another argument for why it's a silly metric to begin with that's a little bit more technical and I think has some merit. And that has to do with the very idea of market cap as a metric in general. The way the market capitalization works with other types of assets is you multiply the number of those assets by their price. Bingo bango, that's the market capitalization. In crypto, people took that same model and imported it over onto these assets. The problem is that it doesn't really reflect the reality of liquidity.

Starting point is 00:13:57 What I mean by that is that there could be a token. that nominally trades at $26 or $27, but that if anyone sold any amount of that in size, it would crash the market entirely because there's simply no real demand. This is especially a problem in bare markets when liquidity basically evaporates entirely for anything but the very top tokens. Because of that, when you're talking about Bitcoin dominance, i.e. Bitcoin's market capitalization as a percentage of the larger crypto markets capitalization, you're not taking into account the fact that, while you might be able to sell your second millionth Bitcoin for the same prices

Starting point is 00:14:32 you sold your first, roughly speaking, you might not be able to sell your 200th crappy anonymous token for the same price you sold your second. Matt B, BTC, puts this colorfully saying, if I have one billion bags of dog shit, I sell one bag for $10. My market cap of bags of dog is now $10 billion. This is now taken $10 billion away from this Bitcoin dominance chart. Now the question is how much this really matters. According to Coin Gecko, market dominance for all coins, which is excluding major stable coins in the top six crypto assets, was at around 15% in the depths of the 2019 bare market. By the same measure, all coin market dominance now sits just above 20%. So all coins are, yes, having an effect, but the long tail of low-effort

Starting point is 00:15:13 tokens can't really explain the entirety of this. But I said in a word in there that is also some people's favorite explanation, which is stablecoins. Scott Melko responded, stablecoins not factored into standard dominance calculation. USDT and USDA were tiny or non-existent during previous spare markets. That chart is effectively broken. Now, Ledin says, what are investors holding in this environment? The answer is stable coins. Meet crypto's new safe haven asset. Now, this I think is definitely a piece of it. In 2018, people just weren't holding tether, and USDC didn't exist until September 26 of 2018. Stablecoins have now become effectively the most stable asset, taking that role from Bitcoin. In the same way that trading pairs were

Starting point is 00:15:55 always with Bitcoin in 2017, and that shifted to stable coins in this last bull market, so too is the stable, keep me out of everything, asset going to change to stable coins now that they're so endemic. If you look at the history between 2019 peak bear market to now, stablecoins went from 2% to 14.8%. More importantly, from peak 2020 bull market to now, stable coins went from 5% to 14.8%, which is a demonstrable flight to safety going into stable coins. Comparing that to the previous cycle, USDT went from 0.2% to 2%, a meaningful increase, but was still dwarfed by the overall market. And I think we're starting to get a picture here. You're seeing a little bit in the all-coin side, you're seeing a little bit in the stable coin side,

Starting point is 00:16:35 but another popular argument was, of course, the strength of Eath compared to previous cycles. Raul Paul wrote Mechaff's Law and the adoption effect plus the merge and the lack of narrative appeal that drives adoption. Zero X Hammer writes, where's the innovation taking place? I use Ethereum and L2s every day, haven't used Bitcoin in years. Eager Capital's Scoopy writes, because large players are increasingly more comfortable holding ETH stable coins. Cryptotrater Guy writes, the flight to safety on chain now also includes ETH. More people are more comfortable with using Ethereum than previous cycles, and also

Starting point is 00:17:05 trusting their native digital asset is still going to be there at the end of the bare market. There were a lot more folks who had various versions of that argument as well. What are the numbers say? Ethereum is one of the biggest changes. It represented below 10% last bear to knocking on 20% now. That's obviously a doubling of its place in this bear market composition. So if you take all of those answers and you take Noel's answers, what you have is just a market that looks different, where Bitcoin serves a different role. Stablecoins have taken much of what that role used to be in the context of what made Bitcoin dominance as a metric interesting in the first place.

Starting point is 00:17:41 I also think that the folks who write that there is an infinitely increasable world of tokens out there, which means that Bitcoin's dominance is likely to fall over time are correct as well. That's just the nature of the expansion of the industry. To be clear, I don't think Bitcoin's dominance staying at 40% or whatever it is or going down even represents a problem in any real way. It's mostly just an interesting lens through which to look at how things have changed in this industry over time. Still, I do think that we should be looking for relatively better rather than relatively worse metrics, and I think it would be reasonable to come away from this saying, I'm just not sure how useful Bitcoin Dominance as a metric is anymore.

Starting point is 00:18:19 Luckily with that, there are plenty of folks out there who are figuring out much more interesting and relevant metrics to use. Checkmady, the lead on-chain analysts at GlassNode, argued hard that Bitcoin dominance was an outdated metric, and that ratio of realized market cap was a more appropriate metrics to use. Realized market cap looks at tokens at the last price they actually traded hands, which tends to filter out those tokens that are nominally priced at a certain level and have a big overall market capitalization, but with a tiny fraction of the supply actually moving

Starting point is 00:18:49 at any given time. Indeed, CheckMedia explained that Realized Cap filters out those small tokens, which are mostly held by insiders and not traded. It also removes stable coins and lost coins from the mix. When you look at that chart, he writes Bitcoin's dominance is at 59% and rising at multi-year highs. Market Cap is a metric that allows the SBFs of the world to run their high, fully diluted value scam, valuations, and dupe investors. Realized Cap is the ultimate valuation tool as it requires tokens to truly circulate and thus influence the daily traded volume to pressing prices. So where I'll leave you is that if you're interested in this, go check out that post on my Twitter at NLW, like all of my accounts. CheckMady has the biggest response. I'm pretty sure

Starting point is 00:19:30 at ratio the original post, which I completely support. I also retweeted it. And in any case, I hope this is an interesting look at how the world has changed through the lens of this one particular metric. For now, I want to say thanks again to my sponsors, nexo.io, circle and crackin. Thanks to you guys for listening. Until tomorrow, be safe and take care of each other. Peace.

The Breakdown - Why Is Bitcoin Dominance So Much Lower Than in Previous Bear Markets?

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