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Bitcoin dominance has been slowly climbing since the buying narrative began playing out earlier this year. Currently it sits at about 70% of the crypto market cap. At the height of the 2017 mania, Bitcoin dominance was at 35% as altcoins ballooned in value.
So it appears there may be an imbalance, but what does crypto market equilibrium look like in terms of market cap percentages?
To answer this question you need to start at assets used globally to store value. The different major buckets breakdown roughly like this:
$90T Fiat Currencies
$250T Real Estate
But the financial word isn’t static. Built on top of these buckets (and more) are derivatives. These derivatives are used to buy, sell, and transmit risk. The modern world runs on them because they allow asset owners to hedge against downside events. In comparison to SoV buckets the derivatives market looks like this:
$1000T+ Derivatives ($1Q if that’s a thing)
Things like buying food from farmers, purchasing a house, insuring your car, and funding a business are all enabled by the risk markets. Instruments like mortgage bonds and commodities futures trade on the risk associated with the underlying assets like corn and mortgages. Derivatives leverage collateral in the store of value buckets to operate.
Decentralized finance (DeFi) is the beginning of crypto’s plunge into risk transmission. DeFi markets are lending and transacting on collateral digital assets via smart contracts. Long term hodlers are lending out their coins in exchange for yield and borrowers are paying the yield to lever up investments. In essence DeFi is creating a derivatives market for crypto.
As DeFi continues this experiment (#testinprod) it will need to draw in more value to its market cap to use as collateral. Put simply, you can’t create derivatives on nothing.
In the traditional world of finance the ratio between derivatives and stores of value is about 2:1. That translates to a Bitcoin dominance of 33% at some kind of equilibrium comparable to traditional financial markets today.
But we need to remember crypto is a nascent market and we’re on a timeline. The first step in establishing a derivates market is to suck value into the underlying assets. That’s what’s happening today. Bitcoin’s price is climbing along with its market cap and Bitcoin dominance is following.
As the market develops, it’s very possible we see Bitcoin dominance trend downwards towards 33% as altcoins rise. Currently, we’re in the process of weeding out bad actors (scams, frauds, ponzi schemes) from the legitimate altcoin projects. When this process is complete we’ll be one step closer to equilibrium and probably much closer to 33%.
The ride up in alts will be bumpy and winners will be hard to pick, but those that end up ahead will win in a big way likely grabbing $100s of billions in market cap.
Thanks for reading, I’ll talk to everyone on Thursday for a final edition to close out the year.
The Portfolio Rundown
The Bitcoin position is steadily eating the portfolio as BTC charges ahead of lagging altcoins. In recent days alts have seen significant forward progress lessening this effect slightly. Deeper in the alt stack ADA has made more progress towards $0.20 as LINK has receded resulting in a skewed allocation (I’ve been targeting 10% for each).
As of right now I don’t have any plans to rebalance. Bitcoin is on a run and altcoins are starting to heat up. I expect to address the shrinking cash allocation early in 2021, the trigger for that will be a cooling off of the recent bull run, for now I don’t see that happening anytime soon.
That will also coincide with another investment thesis I’m developing around a few exciting projects, I’ll be sharing more on that in 2021 so be sure to stay tuned.
Nothing in this email is intended to serve as financial advice. Do your own research.