The Bitcoin dominance rate is a parameter mentioned in many forecasts about future BTC and altcoin movements, but is it a reliable indicator?
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Three reasons why Bitcoin dominance is an imperfect indicator
The dominance of Crypto Bull has always been one of the first information reported on websites for the ranking of cryptocurrency such as Coin360 and CoinMarketCap. Although it may seem a consolidated and linear parameter, the market share indicator makes less and less sense over time.
One factor to take into account is the impressive growth achieved by the stablecoin industry. Over the past year, Tether (USDT) and USD Coin (USDC) have seen their market capitalization explode. Should they also be aggregated in the same ranking as ‘dominance’?
Whatever the answer, crypto investors need to realize that simply studying BTC dominance to decide whether or not to change altcoin allocations in their portfolio has become less effective.
The Floating Problem
Simplicity is probably the main reason that explains the popularity of market capitalization as a parameter. Even beginner investors can understand that multiplying the last market price by the number of coins in circulation allows for total market capitalization. The same reasoning applies to equities, mutual funds, ETFs and most marketable assets.
The problem arises when the regularly traded quantity is rather small compared to the circulating capital. Some of the most globally relevant equity indices are based on the free float concept.
The objective of this adjustment is to avoid the distortion caused by an exaggerated capitalization, and consists of excluding shares that cannot be moved freely. The immobility of shares or currencies is usually the result of lock-up periods or shareholder agreements.
In traditional markets, free float is used by S&P 500, Nasdaq-100, CAC 40, DAX, HSI and FTSE-100. As a result, the market capitalization of each company is adjusted according to the percentage of shares freely available for trading.
Transparency in the crypto industry is still lacking
While information about the availability of a public security can be easily found through the documentation of the U.S. Securities Exchange Commission (SEC), there is no such rule in the area of cryptocurrency. You can easily verify how many Bitcoins have been sent to the genesis block. These coins cannot be spent, but the same is not true for all cryptocurrencies.
As reported by Cointelegraph, the Bitcoin balance sheets included in Grayscale’s investment funds are also blocked. Currently GBTC and similar funds do not have fixed redemption programs, so the investor has no way to take possession of the underlying asset, BTC.
With the exception of these simpler cases, we can only deduct the number of BTCs lost over the years. Some studies have indicated that up to four million Bitcoins are lost forever, including one million attributed to Satoshi mining.
The problem of floating is even bigger in the case of cryptocurrencies born through forks. For example, a third of Bitcoin Cash (BCH) has never been touched.
Aggressive emission programs and double counting are problematic
As for Bitcoin and its forks, there have not been many changes in the coins untouched or lost. So, you could say that they should not affect the latest BTC dominance data. Nevertheless, this estimate does not take into account the equivalent inflation of the remaining cryptocurrencies.
According to Messari data, only in 2020 there will be 20% more Ripple (XRP) in circulation. This increase is followed by 40% of Compound (COMP), 17.4% of Stellar (XLM), 15.6% of ZCash (ZEC), 13.8% of Polkadot (DOT) and 10% of Cosmos (ATOM).
It is important to emphasize that the increase in the supply of a cryptocurrency does not necessarily lead to an increase in its market capitalization. This effect depends on the variation of the unit price for each cryptocurrency. However, this inflationary pressure is more on the altcoin and exerts a negative pressure on the Bitcoin dominance rate.
For each DAI issued, there is a basket of other cryptocurrencies that guarantees it. The same is true for the ERC-20 Wrapped BTC (WBTC) token, guaranteed by Bitcoin on a 1:1 basis. These are some of the examples of double counting that can inflate the market capitalization of cryptocurrencies.
Past performance does not guarantee future results