April 11, 2018
Over the recent period, there is a negative relationship between the price of bitcoin and the “bitcoin dominance” figure. That is, the higher the price of bitcoin, the lower its market cap as a percentage of the total market cap of all crypto currencies.
The chart below shows this inverse relationship from mid-2016 until April 2018.
Data sources: Bitcoin price from Bloomberg.
Bitcoin market cap and Alt Coin Market Cap from https://coin.dance/stats/marketcaphistorical
. Bitcoin Dominance is defined as Bitcoin Market Cap/(Bitcoin Market Cap + Alt Coin Market Cap).
Indeed, there is a strong negative correlation between the two series of about -82%.
There are several explanations behind this phenomenon:
a) Many projects came on line in 2016-2017, including many ICO’s and other alt-coins. This increased the total market cap.
b) At the start of 2018, the ICO market seemed to have slowed down. Regulators warned that some (or all) ICO’s will be treated like equities. This occurred in tandem with price drops.
c) In traditional equity markets, smaller cap stocks have a higher beta than larger cap stocks. That is, small cap stocks will move more (in percentage terms) than large cap stocks. Hence, in an increasing market, small cap stocks will increase faster than large cap stocks. The same phenomenon happens in reverse. In a declining market, small cap stocks will drop more than large cap stocks. Anecdotal evidence shows that the same is true with crypto-currencies. Lower cap currencies’ price will more in percentage terms than larger cap. For example, between 2/8/18 and 4/4/18 the price of bitcoin dropped by about 10% while the price of ether dropped by 49% and ripple dropped by 28%.