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It’s not too unusual a position, but I have always viewed Bitcoin as distinct from the rest of the cryptocurrency market. 

To me, Bitcoin is intriguing because it has macro implications. It can be analysed through a unique (macro-driven) framework. It runs on an increasingly rare proof-of-work mechanism. It can be compared to commodities with regard to the demand/supply dynamics. It can be modelled through a whole host of different methods (I have played around with many of these, for better or worse).

Whether you “believe” in Bitcoin or think it’s nothing but a speculative get-rich-quick-scheme, it is tough to deny that it is unique. As I said, this point of view is not unheard of (see the term “shitcoin” for evidence of some of the contempt that many in the space have for altcoins). But what is interesting is that it appears the market is coming more and more around to this point of view. 

Bitcoin dominance is the ratio of the Bitcoin market cap to the cumulative market cap of all cryptocurrencies. It opened the year below 43%, and is now primed to break through 50%. 

This doesn’t sound overly dramatic. And it’s not. But when we zoom out and look at how Bitcoin dominance moves historically, we see that this represents a notable shift in the historical trend. 

To see this, we first need a quick history lesson. Bitcoin was launched in 2009 and its dominance was above 95% until 2017, which was the year when crypto first exploded. Perhaps not quite the mainstream stage (yet), but Bitcoin hit $20,000 by the end of the year. Bitcoin dominance, on the other hand, plummeted to 37% as a host of altcoins came on the scene. 

This new paradigm then came to a bone-crushing halt amid the bear market of 2018. Many altcoins were wiped entirely, and those that survived made Bitcoin’s fall from $20,000 to $3,500 seem attractive. By 2019, dominance was 56%. By 2020, it was higher again at 67%. 

And then came the pandemic surge. Meme coins, NFTs, DeFi. Crypto, crypto, crypto. Screenshots of 1000X gains. You get the point. Bitcoin dominance fell to 42% by the end of 2021 as altcoins went vertical (despite Bitcoin itself hitting an all-time high of $68,000). Until this year, dominance more or less remained there, trickling down slowly but remaining relatively range-bound. 

To sum this price pattern up, Bitcoin dominance tends to rise when Bitcoin rises and fall when Bitcoin falls. This makes sense intuitively – altcoins are riskier propositions and many of them essentially trade like levered bets on Bitcoin. If Bitcoin rises, altcoins rise more. If Bitcoin falls, altcoins fall more. 

I am always hesitant to read too much into crypto’s price history as not only is it incredibly brief, but much of it came amid uber-thin liquidity conditions when crypto was still a niche asset class. But this pattern more or less holds as a rule of thumb (2022 perhaps was surprising that dominance did not fall more, but this was a reflection of the sheer growth in the number of cryptocurrencies during the pandemic bull run, more than anything else). 

2023 is very different. Thus far this year, Bitcoin has jumped 54%. But dominance hasn’t fallen, instead rising close to 50%. Bitcoin has been lagging somewhat the past few months, but was on a tear in Q1 and is still having a tremendous year. But altcoins have not followed to the degree that one would expect. For the first time ever, an aggressive Bitcoin run-up has been met with a steep jump in dominance, too. 

There are a couple of likely theories for this. The first is the great regulatory crackdown in the US. The SEC last week sued the two biggest crypto companies on the planet, Binance and Coinbase. The big sticking point is whether cryptocurrencies constitute securities, a somewhat grey area that appears to be getting slightly-less-grey, at least in the eyes of the law. The SEC confirmed it views many tokens as securities and while not all of them were included (Ethereum remains in regulatory purgatory), it seems increasingly clear that Bitcoin is being carved out into its own role (dare I say commodity?). 

Robinhood and eToro pulled a bunch of tokens from their platforms as a result – Cardano, Solana, and Matic among those chopped after being outlined as securities by the SEC. More exchanges and trading platforms may follow. Understandably, this crackdown is causing hesitance in the market and dampening the appetite for these altcoins. 

The second factor is tougher to quantify, but arguably just as important. Put simply, crypto had its reputation dragged through the mud last year. The collapse of Terra, the staggering FTX fraud and the Celsius insolvency being among the most high-profile. While these incidents have hurt Bitcoin immensely, the damage to the rest of the crypto market is worse. 

These “investments” were always gambles, but the elevated risk was made abundantly clear to so many throughout the winddown of 2022, and the sheer pace and scale of the fall has surprised people. Will people be so quick to trust them again, or will they just…not bother?

With the hand of the law coming down hard too, altcoins don’t exactly represent attractive propositions to the masses right now. Besides, with rates having climbed from 0% to north of 5%, this is not the free-money environment which, until last year, had existed throughout crypto’s life. 

The economy is in a new paradigm, amid the fastest rate-hiking cycle in recent history. The hysteria of a decade-long explosive bull market is gone, and the investment landscape has changed. Investors don’t need to run so far out on the risk curve to chase yield. 

Bitcoin is not crypto – a line that is oft-repeated in the space, and one that is ridiculed as much as it is praised. But it seems like the market is starting to agree. 

The post Bitcoin dominance hits 2-year high: BTC separating from market amid regulatory pain appeared first on Invezz.

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