How the crypto market can move.
Cryptocurrencies including Bitcoin are categorised as “risk-on” assets from an investment perspective. Loose monetary policy and low interest rates create a market environment where investors increase risk. As interest rates have increased in 2022 we have seen investors retreat to “risk-off” assets such as gold and commodities seeking safe haven assets to preserve wealth.
Crypto markets move in certain ways that we can broadly anticipate but not specifically predict. Here we’ll take a look at how crypto markets tend to move.
BITCOIN DOMINANCE
The Bitcoin dominance chart shows the percentage of the crypto market share that is Bitcoin. As of the 23rd of July 2022, there are over 20,000 cryptocurrencies, according to coinmarketcap and BTC is the dominant market
BTC Dominance chart, monthly
The left of the chart shows BTCs value being upwards of 90% of the overall value of the crypto market i.e. if the entire crypto market is valued at £100 then BTC would be worth upwards of £90.
BTCs dominance has been declining since 2017, when many other cryptocurrencies burst into existence and ICOs were a plenty. Consequentially there is less money available for Bitcoin as investors seek exponential gains in even riskier assets.
BTC dominance is ranging between 39% - 49% meaning that money is flowing back and forth between BTC and Altcoins. I am anticipating BTC dominance to gradually move to the upside somewhere between 49% -59% with a likely destination of 52%. The way we use this insight is to direct designated crypto investment toward bitcoin before moving those gains into Altcoins when the market flips. In a surfing analogy it would be like moving from one wave to the next without stopping.
Yellow arrows pointing down signal when alt coins increase in value as investors move money from BTC gains into alt coins. Arrows moving upwards to the right, signal when BTC is reclaiming market dominance as investors transfer money from alt coins into BTC or risk-off assets.
This image loosely shows the money flow in the crypto bull market, when the macro market is stable. As the market leader Bitcoin tends to move upwards first before alt coins such as ETH and other large cap and layer ones move and so forth. It is not an exact science and some high risk investors will go straight for the ICO investments but that is extremely high risk and arguably not the best use of capital.
If you think of the internet as a layer one and then all of the apps on a mobile phone / tablet device as layer 2s. Layer 1s are the base from which other companies build. Many NFT companies use Ethereum to build their business on top. Bitcoin Lightening Network is a layer two product built on top of the Bitcoin core network.
It will be increasingly unlikely that BTC will regain high levels of market share dominance as more cryptocurrencies are created.
Take aways:
We can use the BTC dominance chart to assess what phase of a market cycle we are in.
Based on the crypto money flow image consider what type of investment strategy you want to enact. What level of risk are you comfortable with? What is your time preference?
BTC dominance is in a downward trend due to the bear market and increased number of cryptocurrencies compared to previous years.
Although BTC dominance is decreasing it does not mean that BTC value is decreasing.
I am anticipating BTC dominance to increase throughout 2022 potentially into 2023 before alt coins start to gain on BTC.
Although it is plausible to invest in alt coins it is higher risk than investing in BTC when market dominance is uncertain.