New Crypto Market Research Reveals True Bitcoin (BTC) Dominance Could Be 80% with Liquidity Metric
The metrics of Bitcoin are complicated, but there are a few factors that any investor understands – price, circulating supply, and market cap. Market dominance is a little more complex, but it is just the percentage of the total market cap of all cryptocurrencies with how much of the portion BTC holds.
However, Bitcoinist recently posed a question, regarding if the community has been wrong about the interpretation of this number.
John-Paul Thorbjornsen recently decided to investigate, considering the recent reports of Bitcoin’s 50% dominance score. However, Thorbjornsen said that a better way to demonstrate the dominance of Thorbjornsen is in their trading volume or some measurement of their liquidity. He spoke on the Pareto principle, which is also known as the 80/20 rule.
The rule states that there are 20% of crypto assets that should cover an 80% dominance over the market. This rule often occurs in instances of equilibrium in nature. Considering that cryptocurrency trading is a free market, it is possible that it could follow this pattern, which would be a version of Power Law.
In Thorbjornsen’s discussion, he compared the top 100 crypto assets by their market cap, using a logarithmic scale shown below.
Though there is some form of Power Law, as he expected, it did not quite correlate with the volumes. Ultimately, he found that some coins held under 0.1% of market cap in daily volume, which suggested either an artificial market cap or a trapped market.
Multiplying the volume by the market cap (known as Volume-Weighted Cap), there was a much more substantial correlation. As Thorbjornsen eliminated the bottom third of the coins to correct the Page 1 Effect, the results suggested that Power Law distribution was taking place.
With this metric, Bitcoin dominance was found to be at 80%. With just the top 5 cryptocurrencies by market cap, which is the 20%. Bitcoin holds 85% dominance of the market.
The question remains of what to do with the market dominance metric for CoinMarketCap. Clearly, it should not be eliminated but a renaming could possibly reflect a clearer idea of what it is.
The metric itself is still useful, but future conversations on true market dominance should probably involve the volume-weight cap for greater accuracy, especially when altcoins have almost non-existent liquidity and volume.
To read Thorbjornsen’s full blog on this topic, visit https://medium.com/@jpthor/bitcoins-market-dominance-a9693ff604bf.