Today we’re going to talk about the rise in Bitcoin’s dominance against altcoins and why I still believe Bitcoin to be a superior investment at this time. Ever since the start of this massive cryptocurrency gold rush in March of 2017, there has been cycles where altcoins drastically outperform Bitcoin and Bitcoin drastically outperforms altcoins.
The easiest way to keep track of this is through CoinMarketCap’s Bitcoin dominance chart. As you can see, March to June was a period where altcoins crushed Bitcoin. Most notably, the Flippening almost occurred. However, Bitcoin rapidly recovered some of its dominance and there was a period in August where every single day, it felt like Bitcoin would go up and altcoins would get slaughtered.
The real pain for altcoins came in October though, where Bitcoin broke through $5k. The Bitcoin cycle ended in the beginning of December, and since then we have seen a steep drop in Bitcoin’s dominance from a peak of 65% all the way down to 32% before recovering to where we sit now, around 39%.
Generally speaking, I’ve always found it to be best to position yourself on the side that’s out of favor. There is research that was done by renowned economist Richard Thaler and Nobel Prize winners Fama & French that have illustrated over the long-term, contrarian strategies tend to work because of a very simple principle called reversion to mean. However, you don’t need to be an economist with tons of empirical evidence to understand why this happens.
In my opinion, this occurs due to the fickle nature of investor psyche and the way the voice of the crowd works. In the cryptocurrency space, this is even truer than it is with stocks because prices are more volatile, the market is relatively new and the investors involved are generally younger, less experienced, less wealthy and desperate.
What I’ve seen happen time and time again is that when we are in an altcoin cycle, Bitcoin is claimed to be dead and an outdated technology and while we are in a Bitcoin cycle, the Bitcoin maximalists come out in full force.
I remember recommending Ethereum on this channel back in October when it was trading at around 5 million Satoshi. Recall that we were in a Bitcoin cycle back then, so Ethereum kept going down and there was a Bitcoin maximalist on Twitter that would send me the ETH/BTC chart every single day.
I recommended Ethereum again on Dec. 5th at around 3.9 million Satoshi, from which it fell to a low of around 2.4 million before eventually skyrocketing back up. If you go back to some of my earlier videos, you’ll also see that I recommended altcoins frequently as we saw Bitcoin receive all the focus due to the Bitcoin Gold and Segwit2x hard fork hype. That may not have panned out in the short-term, but it ended up working out well once December rolled around.
They say being right at the wrong time is the equivalent of being wrong, but they often say that when referring to cycles in the stock market and the economy which take years to play out… so being wrong can result in drastic underperformance for very long periods of time which usually results in clients leaving your firm.
Fortunately in the cryptocurrency space, cycles appear to happen much more frequently and usually only over a period of a few months, meaning if you’re right at the wrong time, it doesn’t take long for the market to catch up. Note that the cycles between Bitcoin and altcoins have existed for years, but those cycle swings have become much more extreme now which means better opportunity for us as investors and swing traders.
With Bitcoin Segwit adoption increasing, Coinbase and Bitfinex being the latest on-board, we’ve seen a drastic fall in the average fees on the network. It’s worth noting that a principal reason for why fees have fallen is because Bitcoin transaction volume has plummeted, although on the plus side, the number of outputs per transaction has been increasing which signals more service providers are implementing batching.
Now one of the biggest narratives for why altcoins have been rising in dominance was due to Bitcoin’s sluggish and expensive transactions… but both of these factors have become substantially less problematic, partially for the right reasons (AKA Segwit and batching adoption) and partially for the wrong reasons (AKA network load has decreased).
However, I don’t think the majority of market participants are looking into the “why” and only focus on the end-result, which is that Bitcoin is finally becoming more suitable as a payment option again. Who knows whether or not companies like Valve will start accepting Bitcoin again on Steam for example, but it is less likely that merchants that are currently accepting Bitcoin will drop it as a payment option.
At this point, it’s still safer to accept Bitcoin as a form of payment than any other cryptocurrency due to familiarity, dominance and maturity. I’ve stated before that realistically the only serious reason a merchant should accept any cryptocurrency is to increase sales through marketing hype, not because it offers any serious advantages over alternative payment methods.
I know that probably pisses some people off, but the reality of the situation is that between the lack of clarity surrounding accepting cryptocurrencies as payment and its impact on a company’s books, its impact on taxes, the legality questions surrounding it, security, the frustration of dealing with returns and the insane volatility in the market, accepting most cryptocurrencies is generally going to be a hassle for the overwhelming majority of business owners and I still think the most valid reason for accepting them at this stage for Ma & Pa businesses is so that cryptocurrency enthusiasts spend a few extra bucks at your store.
Obviously this isn’t true for all business owners, particularly the ones who are familiar with cryptocurrencies, but it’s going to be true for most. If you’re relatively unfamilar with cryptocurrencies, you’ll probably want to default to the one cryptocurrency that everyone actually talks about which is Bitcoin. Even at this stage, most people have only really heard of Bitcoin and don’t know what a cryptocurrency is, or Ethereum or Ripple or Litecoin or anything else. That familiarity, along with the fact that Bitcoin has been around the longest, will still lead to higher adoption for it over other cryptocurrencies specifically as a payment option.
But in all honesty, I don’t think adoption is the key factor that is driving these cycles between altcoins and Bitcoin. When altcoins rose in dominance, it had very little to do with adoption and more to do with marketing hype. The more a coin promised, the more money that was pumped into it. Partnership announcements would cause a coin to soar, even if that partnership was relatively unimportant or preliminary in nature.
The same was true for Bitcoin during its last cycle in October. We had just recently lost China, one of the biggest sources of Bitcoin trading volume and people were buying into hype over a fairly obvious joke fork, Bitcoin Gold and the community splitting fork, Segwit2x. To this day, I would say no one can say with any degree of certainty why Bitcoin rose to $20k from November to December other than momentum and hype.
These cycles seem to occur as a result of a shift in the voice of the crowd and an increased number of bagholders on the wrong side of the cycle. In my view, this is how cycles shift:
The first group to move over is the people who suspect that a new cycle has begun and who aim to get back in to their original positions at lower prices later on. The second group to move over is momentum traders, who will generally wait for a strong sign that we are definitively in a new cycle before moving their assets over. For example, this group may wait for Bitcoin dominance to rise over 40% and show some stability over that level before moving over.
The third group is more of a wave, which is the bagholders who see other people moving over and making more money than they are. Once this wave completes, the cycle is over and we move back the other direction.
Some of you might be pointing out that there are times where there are clear paradigm shifts in market dominance, as we saw in March of 2017. What is to prevent such a situation from occurring again? Why can’t the long-term dominance of Bitcoin fall to 25%, or 15% or 10%? This is especially true when you consider a major reason for Bitcoin’s dominance is the fact that it provides the most liquid trading pair against all other cryptocurrencies, but more exchanges are announcing that they would like to add fiat-gateways to altcoins.
My short answer is there is nothing stopping long-term dominance from falling to 25% or lower – it is a very plausible and possible reality. However, I suspect that we are still too early stages for decentralized apps to take off based off what we’ve seen so far:
If Crypto Kitties is the best we have to offer at this stage, then we’ve got a long way to go for the quote-on-quote “Web 3.0.” Cryptocurrencies that are aiming to become payment options will struggle against Bitcoin for reasons I discussed earlier regarding familiarity, dominance and maturity.
In other words, while a lower long-term dominance for Bitcoin is certainly possible, I suspect it is likely far enough away that it isn’t relevant to any trading decisions made now. Furthermore, if we’re looking over the long-term, while it doesn’t seem likely a Bitcoin ETF will be approved this year, it likely will be at some point over the next 5 years which should result in a whole new surge of capital and liquidity for Bitcoin. Note that the problems the SEC discussed when it came to Bitcoin ETFs are even worse for other cryptocurrencies, meaning it isn’t likely we see any ETFs for cryptocurrencies aside from Bitcoin for a while.
In summary, I still see Bitcoin as a superior investment over altcoins even despite dominance rising to 39% recently. Given Bitcoin has traded in a range recently between 32 – 39%, I would probably recommend waiting until a clear break over 40% dominance for those who haven’t already allocated themselves to Bitcoin in preparation for a cycle shift. In other words, I would probably aim to be part of group #2 at this stage since the ship has sailed on being part of group #1. And the best advice I can ever give is try to do your best to never be part of group #3, AKA the buy high sell low group.
I hope you all enjoyed and would love to hear your thoughts on Bitcoin vs. altcoins.