Crypto Market Report: Bull Edition

Market Analysis Jan 23, 2021

Given the ambivalence in the crypto market lately, now feels like the perfect time to take a deeper dive into the markets from a macro level to see if we can ascertain what's really going on underneath the surface.

Some questions we're going to try to answer in this report are:

  • What's going on with Bitcoin? Is the run over or is the party just getting started?
  • Should we simply be packing our bags and leaving?
  • How do we find the "real winners" in the blockchain space?  And who are those winners?
  • How do I keep track of all of the new projects that are being launched every other day?

Hopefully this report is able to answer all of those questions (although there's a chance that we miss a couple here and there!).

But without further ado, let's get started.

Bitcoin Dominance % Fading Fast

One key factor that's been really notable since the beginning of the year has been Bitcoin's fast fading dominance % .

According to data from Coinmarketcap, Bitcoin's dominance % on January 3rd, 2021 was hovering around 72/73%+

Now (nearly three weeks later), we can see that the dominance % for Bitcoin is hovering around 63% - representing an approximate -10% drop in the dominance percentage for Bitcoin!

See below:

Observations Worth Noting

  1. Unlike what we observed in December, there haven't been any crazy fluctuations in the price of Ripple during this period of analysis. This was meaningful in the past when considering the Bitcoin dominance % because its meteoric price gains immediately followed by its abrupt sell off by the markets led to billions of dollars in market capitalization against Bitcoin being added and then removed (thus affecting the Bitcoin dominance % all by itself). However, since the beginning of January, the price of Ripple has remained fairly consistent (around the high 20 cent range).
  2. While Bitcoin has been in a lengthy consolidation period throughout the beginning of 2021, there haven't been any large cap 'boomers' (so to speak), that we can identify as potential culprits accounting for the massive discrepancy between Bitcoin's dominance percentage at the beginning of this month to the present time period.
  3. Given Bitcoin's market capitalization (especially at the prices that its at currently), there must be some massive movements elsewhere in the market that are accounting for this significantly decreased dominance %.
  4. Ethereum's price gain has been really discordant with Bitcoin's price action over the past few weeks (bolstering our theory that Ethereum is on an entirely different price cycle than Bitcoin is), but with that in mind - we cannot overestimate Ethereum's recent price action. Ethereum's price action, alone, cannot account for a 10% decline in Bitcoin's market share over the past three weeks

To drill point #4 home, we consolidated the dominance map down to just Bitcoin, Ethereum, Tether, and 'others' (which literally accounts for 'others ' in the crypto market apart from Polkadot, XRP, Cardano, Chainlink, Litecoin, Bitcoin Cash, and Binance  - the other members of the T10 by valuation)

Below is a photo showing the dominance % of Ethereum on January 3rd, 2021:

At 10%, Ethereum held a nice chunk of the markets.

Now let's see where the dominance % for Ethereum is at now :

At 15%, Ethereum has increased its dominance in the market by 5%, which is a significant jump (approx. +50% increase in market share).

However, even if we were to assume that the all of the gains made by Ethereum came 'out of the pocket' of Bitcoin, there is still another 5% market share lost for Bitcoin that is not accounted for here.

Therefore, since we don't have the answers in front of us immediately, now is a perfect time to consult the MVIS indices - because they will help us identify which sector of the market is performing the strongest.

Consulting MVIS Indices

Once again, we're going to take a look at the MVIS Indices, which provides super useful indices for the top 100 cryptocurrencies (by market capitalization).

Specifically, we're going to look at the diversified T100 indices that are split into three sections:

Below is a look at all three over the past 30 days:

And the results are surprising.

We can see above that the small caps are actually killing it in the blockchain markets (they're the golden line).

Specifically, the delta for the indices is as follows:

  • Small Caps = +65.48%
  • Mid Caps = +41.27%
  • Large Caps = +43.51%

So its obvious that the small caps are killing it.

But that still doesn't answer our question about Bitcoin because if we look at the overall delta for all three indices combined (ticker symbol: MVDA), we can see that the outlier performance of the small caps had little to no impact on the overall delta of the entire T100 (when weighted ; which all of these indices are individually as well as when grouped with each other):

Taking a Look at the Components in the Small Cap Index

Since the small caps have done so well, it seems worthwhile to take another look at exactly which components are included within the small cap index (as well as the respective weights that they're given).

Specifically, in the small cap crypto index for MVIS, the components are as follows:

  1. Sushi (6.36%)

  2. Avalanche (5.19%)

  3. DeFiChain (5.03%)

  4. Kusasma (4.52%)

  5. The Graph (3.53%)

  6. Hedera Hashgraph (3.41%)

  7. Decred (3.37%)

  8. Thorecoin (3.18%)

  9. REN (3.11%)

  10. Elrond (2.92%)

  11. Loopring (2.60%)

  12. Basic Attention Token (2.53%)

  13. Near (2.49%)

  14. renBTC (2.32%)

  15. Creditcoin (2.27%)

  16. Nano (2.24%)

  17. ICON (2.23%)

  18. Terra (2.17%)

  19. 0x (ZRX) (2.04%)

  20. NEXO (2.02%)

  21. Celo (1.96%)

  22. Reserve Rights (1.92%)

  23. BOTXCOIN (1.91%)

  24. DigiByte (1.82%)

  25. BitTorrent (1.78%)

  26. Enjin Coin (1.70%)

  27. Kyber Network (1.52%)

  28. SwissBorg (1.44%)

  29. True USD (not counting)

  30. Quant (1.32%)

  31. Bitcoin ABC (1.31%)

  32. Paxos Standard (1.28%)

  33. Energy Web Token (1.27%)

  34. Ocean Protocol (1.16%)

  35. Augur (1.11%)

  36. Thorenext (1.10%)

  37. Ampleforth (1.09%)

  38. Siacoin (1.08%)

  39. Bitcoin Gold (0.98%)

  40. Band Protocol (0.95%)

  41. Sologenic (0.94%)

  42. Lisk (0.89%)

  43. ABBC Coin (0.86%)

  44. TerraUSD (0.86%)

  45. Status Network Token (0.84%)

  46. Ravencoin (0.72%)

  47. Aragon (0.71%)

  48. ZB (0.66%)

  49. Homeros (0.34%)

Given what we can see thus far (among the tokens covered above), it is beginning to appear as though we are on the cusp  of what they call "alt season".

Quick Recap: What is 'Alt Season'?

Yes, yes - everyone knows what it is.

But...just in case someone reading doesn't this section will very briefly explain what alt season is.

Birth of 'Alt Season' as a Concept

During 2017, when Bitcoin (and anything else that could be traded on a market) was going crazy, there was a really weird phenomenon that could be observed in the Fall of that year (Q4 2017).

Without fail, everytime Bitcoin would begin going on one of its runs (like we've seen recently with Bitcoin climbing by the thousand day after day, seemingly), the 'altcoins' (projects that aren't Bitcoin) would "bleed" as they say.

By 'bleed', that means that they would be in the red.

So, for example, maybe Bitcoin begins taking off with a bunch of momentum and we may see it up +6% or >10% in a given day. But at the very same time, we'd see alts in the negative.

And not just comparatively to Bitcoin - alts would be in the negative overall while Bitcoin was going on these runs.

Obviously, the heavy implication there was that money was "flowing out of alts" and "into Bitcoin" during these runs, which actually is a logical conclusion to come to. After all, what else would account for the fact that all the other projects in the space were losing value as Bitcoin gained value?

"Alt Season" Occurs When the Opposite Situation Happens

After Bitcoin would go on its monstrous runs in 2017, there would be periods  of consolidation (where the price would 'cooldown' / move sideways / etc.).

During these periods is when we saw the greatest gains for altcoins in the crypto sphere.

So, for instance, Bitcoin would theoretically be down by 5% or more, but the rest of the markets would be well in the green (with some projects appreciating by more than 10% against USD during these consolidation periods for Bitcoin).

The prevailing theory at that time was that this "boost" in the price, volume and general market activity for altcoins was a result of money flowing out from Bitcoin and back into 'altcoins' again.

Triggering what is now known as "altseason".

Additional Metrics

Before we go, let's check out what additional metrics that MVIS has for us (they're actually really helpful, this is worth staying along for the read if you've made it this far)

If you're actually on the site itself, there's a 'statistics' panel that you can click on:

Which will take you here:

Digital Assets Indices - MVIS CryptoCompare Digital Assets 100 Small-Cap Index - Statistics

Below we'll publish the meaningful metrics from this section to save readers the hassle (although it is more than likely that some of these numbers will be at least slightly different by the time the reader gets a chance to look at them; but if you're reading this relatively soon after [within 12-24 hours], there shouldn't be too much of a difference):

The next set of metrics are worth paying special attention to because they provide some more substantive information about the actual performance of this subset of cryptocurrencies contained within this small cap index vs. the other digital currency indices (very important).

If some of the metrics / terminology doesn't make sense to you in the next screenshot don't worry about it at all - because we'll briefly explain each and their significance in relation to the "bigger picture" (i.e., making an assessment about the small caps, then developing an informed strategy based on what we learn from the data).

Assessing 'Index Correlation and Volatility'

One of the most important metrics for a trader to consider when determining whether or not they want to hop into a given asset is its volatility.

Generally, you want to look for trending, non-volatile assets.

'What Does That Mean?'

Suppose you see an asset that's up +30% over the past 7 days.

That asset sounds like it could be a potential candidate for a pickup, right? Why not? +30% is a nice gain and significant enough to where it wouldn't be unreasonable to seriously mull over whether this is just a temporary spurt or perhaps the beginning of a longer lasting trend that ends up reaping Tesla-level profits when its all said and done.

Volatility Could Be the Immediate 'Make or Break' Here

Imagine that you decide to take a closer look at this asset since its intrigued you so much.

Upon observing its price action, you notice the following action over the past 7 days:

Day One: +14%

Day Two: +3%

Day Three: -20%

Day Four: +18%

Day Five: -6%

Day Six: +12%

Day Seven: +9%

Let's assume that all of these percentage increases / decreases are relative to the delta (draw this up literally if it makes you feel smarter on your own free time).

If we add up the percentages in the example sketch 7-day returns for our imaginary asset above, we should wind up at +30%, correct?

However, based on the price action that saw above - this asset would be an absolute no go under any condition.

Why?

Because its too volatile!

Whipsaws and price swings all over the place are what we do not want to see out of our prospective investments.

In fact, it should be considered one of the top disqualifiers for entering into a position (any) for a given asset.

You're playing Russian Roulette with an asset like that on the markets.

Example of a Preferred Price Progression For an Asset We Would Invest in

Day One: +4%

Day Two: +5%

Day Three: +4%

Day Four: +4%

Day Five: +3%

Day Six: +5%

Day Seven: +5%

If we add up the percentages above, they add up to +30% just like the previous example (again, we're assuming that these percentages are relative to the delta for simplicity's sake).

What we see above is definitely an asset we would want to take a serious look at investing in.

Why?

Because there's consistency in its price action. Its going in one direction and posting gains day after day.

Ask Yourself the Following Question

Let's say we're on day 8.

You're looking at both of the hypothetical assets depicted above.

If you had to make a long bet on one of these assets, which one would you be willing to gamble will post a gain that day?

A) The first asset, which was all over the place, posting a loss twice in the last seven days with one of those losses being for -20%?

Or

B) The second asset, which has posted consistent gains every single day of the last 7 days with no apparent indicator of a weakening in its trend?

Right.

The decision is obvious.

Believe it or not  - this is a decision that you should be making on a regular basis on the markets when trading (i.e., choosing the less risky asset that still looks promising in terms of potential future rewards that it may provide).

Getting Back to 'Index Correlation and Volatility'

We digressed a bit in the previous section, but let's return back to the chart that we were originally viewing.

We're going to examine the 'index correlation' first:

Based on what we can see from the chart above, the small caps most closely reflect the 'MVIS CryptoCompare Digital Assets 25', which is very interesting, all things considered.

Taking a Look at the MVIS Digital Assets 25

This index can be found on the MVIS website as well, here:

Digital Assets Indices - MVIS CryptoCompare Digital Assets 25 Index - Overview

As we can see from the chart above, the MVIS 25 (digital assets) has outperformed the large caps and mid caps over the past 30 days.

Also, its performance is very similar to what we saw out of the MVIS Small Cap Index (which had a delta of +64.89%)

What is the MVIS Digital Assets 25 Index?

Great question, see below:

Specifically, the components that are included within this index are (with weights included):

  1. Ethereum (18.24%)

  2. Bitcoin (16.34%)

  3. Polkadot (10%)

  4. Cardano (7.38%)

  5. Stellar (5.40%)

  6. Chainlink (5.31%)

  7. Bitcoin Cash (4.27%)

  8. Binance Coin (3.62%)

  9. Litecoin (3.56%)

  10. Bitcoin SV (2.98%)

  11. EOS (2.24%)

  12. Monero (2.20%)

  13. Uniswap (2.05%)

  14. Tezos (2.03%)

  15. VeChain (1.87%)

  16. TRON (1.84%)

  17. NEM (1.78%)

  18. Theta (1.75%)

  19. Cosmos (1.54%)

  20. NEO (1.53%)

  21. Dash (0.94%)

  22. ZCash (0.87%)

  23. Yearn.Finance (0.85%)

  24. Ethereum Classic (0.77%)

  25. Zilliqa (0.67%)

Which makes the correlation pretty interesting (>85% is a pretty strong correlation to this index).

Its worth noting that this correlation is actually stronger than the correlation to just the T10 assets, so its more than likely the assets below the T10 (in the MVIS Digital Assets 25) are the ones that are posting the strongest returns.

Its also worth noting that the weight for the 25 Index is capped at 20 (this is a substantial fact since Bitcoin normally has a really outsized proportion in comparison to the other components in the indices given its valuation + price vs. the rest of the assets in the indices).

Conclusion

There are more points of analysis probably that we should be looking at, but we'll conclude it here.

We already know what our homework is based on what we saw above.

We should probably start carving through the small cap assets to see if we can find the 'true winners' in the pile and perhaps make some short-term investments in them while it is still safe for us to do so (because once the value trickles back into BTC, these assets will more than likely no longer be viable as investment opportunities).

We'll be back here with an update soon to assess the effectiveness of our shift in strategy.

Tags

cryptomedication

Happy to serve and help wherever I'm needed in the blockchain space. #Education #EthicalContent #BringingLibretotheForefront

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