Bitcoin (BTC), a cryptocurrency market leader, is trying to regain its lost dominance even though it trades at nearly 60% below record highs.
Bitcoin dominance at 6-month peak
The Bitcoin Market Dominance index (BTC.D), which measures BTC’s market capitalization relative to the rest of cryptocurrency markets, rose to 47% on May 27. It was the highest level since October 2021.
Daily chart of Bitcoin Market Dominance Source: TradingView
Despite the decline in Bitcoin’s market capital in the past six months, which fell from $1.3 trillion in Nov 2021 to $550 billion in May 20,22, the dominance index rose. This suggests that traders were more comfortable trading altcoins.
Let’s take a look at three reasons traders may have left the altcoin markets to find safety in Bitcoin.
The Ethereum “Merge” narrative is cooling down
Ethereum’s native token Ether, the largest alternative cryptocurrency market cap by market capital, has seen steady declines in market dominance over the past five months – from 22.38% in Dec 2021 to 17.86% May 2022.
Daily chart of Ethereum Market Dominance Source: TradingView
After two years of a steady uptrend, ETH/BTC has plunged more than 200% in the past two years.
Cointelegraph reported that Ether has outperformed Bitcoin over the past few years, in large part due to the hype around its long-awaited protocol update, “the Merge”, which aims to make Ethereum more scalable, and less expensive.
However, the launch of the upgrade to Ethereum’s blockchain has been slowed repeatedly. It aims to move it from proof-of work to proof-of stake. This counterpart is known as Beacon Chain.
Martin Koppelmann, co-founder of Ethereum Virtual Machine (EVM-compatible Gnosis chains), recently highlighted a seven block reorganization on Beacon Chain. This meant that the chain was briefly “forked” during its testing phase.
The Ethereum beacon chain saw a 7-block deep, reorg approximately 2.5 hours ago. This indicates that the current attestation strategy for nodes needs to be reconsidered in order to create a stable chain. (proposals already exist) pic.twitter.com/BkQrKuUlw1
— Martin Koppelmann (@koeppelmann) May 25, 2022
After the May 25th reveal, Ether fell by almost 13.5% against the U.S. Dollar. Meanwhile, ETH/BTC plummeted to 0.059 – the lowest level in six months.
Daily price chart for ETH/BTC with key support levels Source: TradingView
According to OxHamZ, an independent market analyst who noted that Ethereum does not have any narratives to propel ETH’s price up after the Merge upgrade, investors have already “priced into” the network upgrade hype.
What is the story behind owning ETH after the merger? All KPIs are down Active wallets remain stagnant NFT hype dead LP trade volumes trending poorly L2 cannibalization is growing (h/t @TaschaLabs). ETH is down 50%, but its block-space value is also decreasing.
— 0xHamZ May 25, 2022 (@0xHamz).
LUNA to Zero
The Terra (LUNA), market collapse, is also responsible for Bitcoin’s newfound strength in crypto markets.
LUNA/BTC is a financial instrument that tracks the Terra token’s strength in comparison to Bitcoin. It fell 99.99% to 0.00000004 by May, making it virtually worthless.
Meanwhile, LUNA fell similarly to the dollar, raising expectations that traders would dump the token to find safety in BTC or cash.
Daily price chart for LUNA/BTC Source: TradingView
LUNA’s market capital before May’s fatal crash was $40.88 Billion.
Related: Crypto funds under Management drop to a lowest not seen since July 2021
The altcoin market, which includes everything from large-cap crypto projects to sketchy assets, has declined by almost 65% in six months since it peaked at $1.7 trillion.
Chart of Altcoin’s market cap each day. Source: TradingView
A deeper examination of some tokens reveals that they are all down more than 80% from their highs. This suggests an investor exit from altcoins in favor of cash, stablecoins, and BTC.
The downside of DeFi projects, compared to record highs. Source: Messari
Some dead crypto projects so far in 2022. Source: Messari
This is because Bitcoin is not only the oldest blockchain but also stands alone without any central authority.
The #bitcoin network is not controlled by anyone.
CZ Binance (@cz_binance), May 26, 2022
The historical trend is that Bitcoin’s dominance falls during crypto bull market, when new tokens flood the market during the mania phase.
BTC.D dropped from almost 96% in January 2017 down to 35% in January 2018, a result of the infamous initial coin offerings (ICO) pump.
BTC.D daily chart. Source: TradingView
The March 2020 crash marked the start of the DeFi (nonfungible token) and NFT hypes, which were further fueled by quantitative easing at the Federal Reserve.
If Bitcoin’s market dominance does indeed end, this could signal a possible macro bottom in Bitcoin prices and the start of a new bullish phase in the next months.
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