In case you missed my last post on the network effects of Steem, do take a minute to have a look. In there, I take a look at whether STEEM satisfies the properties of Metcalfes Law, and what are the effects of network fragmentation or splits.
The idea of the sum of the parts being less than the whole is an important result to identify, if in intermediate time frames, because they present a lot of uncertainty for the markets and people are more likely to take action based on emotions rather than educated guesses based on sound analysis. That is, is it time for Bitcoin to fall, is it time for alt coins to rise, is it time for both to rise, or is it time for both to fall?
Well, today's post looks at just one thing and that is Bitcoin Dominance.
It is defined by :
Bitcoin Market Cap / Total Market of all Crypto
That is, what percentage of value does Bitcoin's network have against the rest of the alt-coin market.
Though I haven't mentioned this metric before, there are a few things that are important to note about how it relates to everything we have discussed so far regarding network effects and value transfer.
Bitcoin echo rally was the result of Dominance
Bitcoin dominance by definition implicitly means that as Bitcoin Dominance Rises, altcoins fall. Conversely, if dominance falls, then it implicitly means altcoins are rising.
The metric by itself is not enough to tell the complete picture. You might be thinking, "What if Bitcoin Dominance rises but most of the alts rise too?" That means that the Bitcoin Value appreciation is out-pacing the appreciation of the altcoins. It is outperforming the market.
Conversely, what if Dominance is dropping, but Bitcoin is going up? <-- Such as the case now?
It means that both Bitcoin and Alts are going up, but likely, alts are going to be outperforming Bitcoin at least in the short run.
Alts are back??? When Moon??
Hold your horses people, the alt coin season that everyone is looking for is still well and far away. We know that the true alt-coin season doesn't begin until Bitcoin tests it's all-time-high at ~20k, and we are still over 11,000 dollars away from that becoming a possibility. However, it doesn't mean that in the ebbs and flows of the market, the alts won't have their mini rallies - particularly if they're well into their accumulation period. Indeed, nothing -including prices of Bitcoin and alts- go straight up, or straight down, and we must consider what happens in between.
Typically, accumulation periods have several "test pumps" to gauge if the market is ready to go on a sustained rally. This is because large interests need to see whether further liquidity appears as soon as they take the price slightly higher. If it does, it is an opportunity for them to resume accumulation and try a test pump again later when liquidity back in the range completely dries out.
What does the chart say?
The Dominance chart shows a few interesting things. As we mentioned before, the current situation is actually quite reminiscent of 2017. Dominance is going down, but price is going up for both Bitcoin and Altcoins. The altcoins outperform Bitcoin and thus we have a mini alt-season.
Given that a large majority of the altcoins have seen over 90-95% drawdowns, (99% in the case of Steem), the dominance taking a large drop is a short term positive sign. According to the chart, the dominance is now in danger of breaking structural support at ~66.50 and pending a clean break of that, a real altseason should ensue.
Don't get too bullish on alts yet
Though we'll have some temporary relief in the alt market, I believe that it is just that.. temporary. With an aggressive fall of bitcoin dominance, we are looking at roughly 5% drawdown which can be interpreted as a transfer of about 5% of value from the Bitcoin value to the alt market. That doesn't mean alts will pump by 5%, because 5% of Bitcoin is actually quite a lot of value, particularly for some of the smaller mid and small cap altcoins. Therefore, it wouldn't be unreasonable to expect a credible rally to follow if the Dominance continues to fall through the descending triangle formation that it has painted over the last 6 months or so.
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