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Here are 3 reasons why the Bitcoin domain metric is a wrong indicator

September 10, 2020

Bitcoin Domain (BTC) is always one of the first pieces of information to be displayed on cryptocurrency ranking websites like Coin360 and CoinMarketCap. Although it seems like a consolidated and simple metric, There is an argument that the indicator of the dispersion of the market over time makes less sense.

One highlight is the amazing growth of the stablecoin industry. Should the market cap of Tether (USDT) and USD Coin (USDC) explode in the past year, should they be included in the same dominance ranking?

Regardless of the answer, cryptocurrency investors need to understand this A look at the dominance of BTC to decide whether or not changing your allocation to the altcoins in your portfolio is a little less effective.

The free levitation problem

Here are 3 reasons why the Bitcoin domain metric is a wrong indicatorHere are 3 reasons why the Bitcoin domain metric is a wrong indicator

Simplicity is probably the main reason behind the market cap metric’s popularity. Even new investors in the game can understand that by multiplying the price of the last trade by the number of coins in circulation, you can see the total market cap. The same consideration applies to stocks, mutual funds, ETFs, and most commercial assets.

The problem arises when the amount that is regularly traded is very small compared to the remaining capital. Some of the world’s major stock indices are based on the concept of free floating.

This adjustment is made to avoid excessive market capitalization distortions and ignores stocks that cannot move freely. Stocks or currencies that cannot move freely are generally the result of lock-up periods or an agreement between shareholders.

In traditional markets, free floating is used by the SP 500, Nasdaq-100, CAC 40, DAX, HSI and FTSE-100. Therefore, the market capitalization of each company is adjusted by the percentage of stocks that are freely available for trading.

Cryptos still lack transparency

Although information about the public availability of stocks could be readily available Due to the filing with the US Securities and Exchange Commission, there is no similar rule for cryptocurrencies. Anyone can easily check how many Bitcoin have been sent to their Genesis addresses. These coins cannot be spent, but this is not the case with all cryptocurrencies.

As Cointelegraph reported, Bitcoin holdings are also locked in Grayscale’s mutual funds. GBTC and similar funds do not currently have any withdrawal programs in place. This means that an investor will not be able to get their hands on the underlying BTC asset.

Aside from the simplest cases, it can only infer how many BTCs have been lost over the years. Studies have shown that up to four million Bitcoin is lost forever, including the one million attributed to the mining of Satoshi.

The problem of free float is even greater with forked cryptocurrencies. Bitcoin Cash (BCH), for example, has a third of its supply that has never been touched.

Aggressive delivery schedules and double counting are problematic

Someone can argue that with intact and lost cryptocurrencies, not much has changed when referring to Bitcoin and its forks. So, This shouldn’t affect the latest BTC domain data. While this is correct, it does not take into account the equivalent inflation of these currencies.

According to the Messari data In 2020 alone there will be 20% more Ripple (XRP) in circulation. This increase is followed by growth in the 40% from Compound (COMP), 17.4% from Stellar (XLM), 15.6% from ZCash (ZEC), 13.8% from Polkadot (DOT) and 10% from Cosmos (ATOM).

It’s important to note that increasing the supply of cryptocurrency does not necessarily increase market capitalization. This effect depends on the unit price change of each crypto. However, this inflationary pressures hangs over altcoins and puts negative pressure on Bitcoin’s dominance index.

For every DAI issued, there is a basket with other crypto currencies behind it. The same applies to the ERC-20 token Wrapped BTC (WBTC), which is supported 1: 1 with Bitcoin. Here are some examples of double counting that can increase cryptocurrency market capitalization.

Past performance does not guarantee future results

Thinking about the 2017 bull run Bitcoin’s 1.318% run may seem unimaginable, but the truth is, it didn’t even make the top 10 for performance this year. Led by XRP (36.018%), NEM (XEM) (29.842%), Ardor (ARDR) (16.809%) and XLM (14.441%).

That initial move of 1.318% could have created the myth that BTC’s dominance should wear off during the bull runs in cryptocurrency. and the term “Altcoin Season” was invented to reflect the perceived upward movement that occurs when the dominance rate of Bitcoin falls.

Bitcoin USD price (blue) and dominance (red)

Bitcoin price in USD (blue) and its domain (red). Source: TradingView

Note that BTC’s dominance dropped from 95% to 37% in early 2018. Back then, we were seeing new ICOs every month with some over $ 5,000.

In this way, These newcomers have increased the market cap of altcoins by a huge amount. regardless of the increase in the price of Bitcoin.

Fast forward two years to recovery in mid-2019 and the subsequent accumulation period, and we saw the exact opposite of the 2017 trend.

BTC’s dominance grew as the price of Bitcoin rose and stabilized or adjusted when the leading cryptocurrency didn’t go beyond the $ 12,000 level.

Bitcoin USD price (blue) and dominance (red)

Bitcoin price in USD (blue) and its domain (red). Source: TradingView

The BTC dominance shifts accordingly to the current listings

The dominance of BTC has dropped from 70% to 60% over the course of 2020. While Bitcoin saw a bull surge from $ 7,100 to its current level of $ 10,200. As mentioned above, there are innumerable factors that affect the indicator.

Some investors and analysts point this out The entire emerging DeFi (decentralized finance) token movement is a major factor in the current shift in bitcoin dominance. Stable coin issuance got too big, hitting the $ 17 billion mark in 2020.

Regardless of the reasons for the recent decline in the dominance of BTC, it is wrong to infer a direct relationship between the indicator and the market’s bullish or bearish trends. It should be noted that the current control rate of 60% cannot be compared with that of previous years.

The views and opinions expressed here are solely those of author and do not necessarily reflect the views of Cointelegraph. Every investment and business move is associated with risks. You must do your own research when making a decision.

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