Don't Throw Bitcoin Out With The Bath Water
As bitcoin dominance wanes in the near-term, we advise readers to zoom out.
Despite a very convincing correlation between bitcoin and shitcoins, when shitcoins go to zero, bitcoin won’t join them.
In a bear market in which liquidity is being drained like never before, and the rangebound price action crushes market participants’ spirits, bitcoin is set to reabsorb the misplaced liquidity currently residing in speculative affinity tokens.
If you believe in a future with bitcoin as a global base layer money, then you need to understand that the strong correlation between bitcoin and its imitators represents a false equivalency—assigned by the market in the infant years of bitcoin, and slowly waning as the world distinguishes between one and the other.
Programatically Scarce Digital Money ≠ Infinitely Reproducible Affinity Tokens, and the market is slowly catching on.
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Fading the ETH/BTC momentum narrative, an out-of-cycle move that is propped up by misplaced euphoria.
Cryptocurrency is only given meaningful value when bitcoin is heavily associated with it, per our linear regression.
A basket of cryptocurrencies in aggregate fails to make higher highs against bitcoin over several market cycles.
Market Is Overly Euphoric for the ETH Merge
We start today’s article with a tweet from our good friend Will Clemente:
Bitcoin dominance is hitting a key level of 39%, signaling that the broader cryptocurrency ecosystem is making up a larger overall proportion of market capitalization than bitcoin. The behavioral implications of this chart are substantial—the market is pricing in a higher relative value of non-bitcoin cryptocurrencies:
The likely narrative here is Ethereum is being bid heavily moving into the merge to proof-of-stake, which is 6 days away, and is drawing liquidity away from the relatively stagnant bitcoin. The ETH merge is the clear catalyst in our view because this is the first time that bitcoin dominance has materially decreased during a bear market. The ETH merge narrative is likely the catalyst for this out-of-cycle behavior, and given that it’s a catalyst driven more by euphoria and speculation than value-buying, it’s a narrative that causes us suspicion.
Our position that Ethereum is pulling up the rest of the cryptocurrency market relative to bitcoin is in confluence with the ETH/BTC cross. This is another barometer of cryptocurrency dominance compared to bitcoin. It has risen significantly after first bouncing off the key 0.055 handle in July, moved past another key level of 0.08, and is gunning for the 0.09 handle (which clear the path for another run at the previous highs):