If one wants to look at how the cryptocurrency landscape has changed over time, they can do so with just a single chart. This graph displays each cryptocurrency’s share of the total industry market capitalization relative to all the others. It’s called the ‘Dominance’ chart and illustrates how investors have chosen to diversify their cryptocurrency holdings over time. Since market capitalization can only be measured in terms of fiat money, this chart couldn’t possibly be drawn before early 2013, when the first fiat exchanges hit the industry.
From then until mid-2013, bitcoin enjoyed relative supremacy with over 95% of the market’s investment capital. Litecoin, an early bitcoin emulator with a few key differences, took 4% of the pie, with about 1% delegated to several altcoins under the ‘Other’ label. Few new blockchain platforms interrupted this dynamic, except for Ripple, which floated between 1% and 6% of market share between 2013 and 2015. Dash and NEM failed to stir up a frenzy as Ripple had, but the entire market was interrupted in mid-2015 when Ethereum burst onto the scene.
The onset of 2015 was an important turning point for the market for two reasons. The first was that Ripple gained as much as 13% of the industry’s fiat value, demonstrating to participants that bitcoin could surrender market share without cracks forming in the foundation of this newly advanced architecture. The second and more impactful change was Ethereum—a blockchain solution like none the world had witnessed until that point. With smart contract functionality, new altcoin projects quickly began spawning thanks to the token-sale trend, and took their own pieces of the pie (small as they may have been). Observers of the chart can clearly see the entrance and growth of new coins from 2015 onward, and how bitcoin has been continually bleeding dominance ever since despite its growing market capitalization. But the psychology behind this trend has several components besides mere asset diversity.
- The “Ground Floor” Theory
Those investing in newer cryptocurrencies looked towards bitcoin and its lofty relative fiat value as a target, a potential price and market capitalization to aim for. The argument went, ‘if bitcoin can achieve such a market cap, why not this coin? It addresses a large market, has a minimum viable product, and has already demonstrated some value.’ These individuals believe that by entering at the ground floor, they will be able to capture growth on the same scale as someone invested in bitcoin back as early as 2013.
2. Degrading Value of Bitcoin
The idea above is only reinforced by bitcoin’s proven weakness at meeting its own goals. As problems with its fungibility, speed, and costs are highlighted, coins that successfully solve a real problem look that much better. Initial coin offerings for smarter solutions get lots of attention and receive a proportional amount of funding, such as HoToKeN—an innovative cryptocurrency used in Asian retail leader HotNow’s discount platform. Coins such as HoToKeN, which can demonstrate value that isn’t related to fiat money whatsoever, contrast with those like bitcoin, which put a premium on their value instead of their utility. Merchants incentivize grassroots marketing activities from their customers with HoToKeN, who will then turn around and use it at the business itself.
3. Trading the Pink Sheets
Penny stocks aren’t seen by many as a solid investment, but in the unregulated crypto world, where coins under $0.10 are more likely to be targets for ‘pump and dump’ schemes, the cheapest coins enjoy high volume. This notion also supports the common misconception that someone cannot buy anything less than a single bitcoin, which is patently false. It’s more fun to see thousands of coins in one’s wallet than fractions of one.
4. It’s All About Bitcoin After All
Many understand that those individuals trading altcoins and other bitcoin competitors are simply trying to take advantage of market swings, only to consolidate their speculative earnings back into bitcoin when all is said and done. Being denominated in bitcoin often makes for an inverse relationship between altcoins and their underlying precursor, so if one sells their bitcoin at a ‘top’, buys into altcoins and rides them upwards, only to sell and re-buy bitcoin at its relative ‘bottom’, they end up with more bitcoin in the end.
5. Self-Fulfilling Prophecy
The fickle cryptocurrency market is more susceptible to self-fulfilling prophecy than any other investing community on the planet. Spikes and subsequent dips in bitcoin almost unanimously follows the famous ‘Bubble’ graph, whereby a market goes through a preset series of psychological changes relating to technological hype, or in this case, dollar value.
Bitcoin’s price chart has been almost identical to the ‘Bubble’ chart many times over its history. From the time when its all-time high was $0.25 to the latest peak of over $19,000, bitcoin’s repeated cycling of this pattern isn’t curious when one considers just how impressionable its traders are.
A common piece of advice for panicky traders on cryptocurrency forums is to ‘zoom out’. It means to adjust one’s perspective, and to see how far the industry has come since it began. While this assumes prices will generally continue their upward trajectory, this assumption isn’t necessarily wrong. People have proven that they’re willing to go to extreme lengths to protect their investments, and money keeps pouring into the market at a rapid pace. At certain psychologically significant points (perhaps a total market capitalization of $1 trillion), however, it will inevitably recede until the market is ready to ‘buy the dip’ once more. But what will they be buying? Only the coins with real use cases and dedicated teams, who care not for their coin’s dollar value, will survive cryptocurrency’s increasingly frequent cycles of rise and decline.
This is a Guest Post wrote by Eran Halevy.