Bitcoin, Diminishing Returns and Being Relevant
Also Bitcoin Dominance and Global Inflation
Welcome to the Friday edition of the Ecoinometrics newsletter.
Every week we bring you the three most important charts on the topics of macroeconomics, Bitcoin and digital assets.
Today we'll cover:
Bitcoin, Diminishing Reutrns and Being Relevant
Patterns of Bitcoin Dominance
Global Inflation
Each topic comes with a small explanation and one big chart. So let’s dive in.
In case you missed it, here are the other topics we covered this week:
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Bitcoin, Diminishing Returns and Being Relevant
Here is a common misconception: "diminishing returns are inevitable for maturing assets."
Investors typically assume that smaller, less mature assets will outperform those worth hundreds of billions. But this isn't a law of nature. And there are notable exceptions.
Take NVIDIA for example.
More than 20 years after its IPO, it's showing stronger and more consistent returns than in its first five years. Why? Because it is relevant thanks to the AI boom.
The same logic applies to Bitcoin.
Bitcoin isn't doomed to perpetually smaller returns as it matures. The faster fiat currencies are debased and the larger government debts becomes the more relevant Bitcoin becomes.
All that doesn’t tell us where Bitcoin is going to be tomorrow or next month. But if you are looking for a multi-year view on where Bitcoin is going that’s all you need to know.
Patterns of Bitcoin Dominance: An Unusual Cycle
A normal sequence in a crypto market cycle looks like that:
Bitcoin’s dominance rises during bear markets.
It continues to increase in the early stages of a bull market.
As the bull market matures, investors start allocating capital to higher-risk assets like Ethereum and other altcoins.
As a consequence Bitcoin’s dominance begins to decline.
We haven’t seen that full sequence play out so far.
Bitcoin’s market share has increased steadily since the last bear market. Bitcoin is now 56% of the total crypto market cap. Ethereum is second with 15% and all the rest put together is 29%.
So there are two possibilities:
We are experiencing an atypical market cycle.
The real bull phase hasn’t truly begun yet.
Which is it?
Global Inflation Normalize
The US dollar is the global reserve currency. For all intents and purposes this is the only fiat currency that matters.
That's why 90% of the economic data that I report on is about the US economy. Including inflation.
But of course the post-COVID inflation spike was a global problem. So instead of focusing only on the US we can zoom out a bit and consider inflation as a global phenomenon.
Four years after COVID where is inflation at? Well, almost everywhere, inflation is back into much more sustainable range.
Worldwide the median inflation rate (year-on-year) is 3.3%. Asia, Europe and North American are getting pretty close to the 2% mark.
Of course there is still some large disparity within regions. But globally inflation is following the same trend which is a slow (sometimes very slow) return to the pre-COVID level.
That's why most central banks can now afford to start lowering their benchmark interest rates. Unless we are heading for a global recession this is supportive of risk assets and Bitcoin.
That’s it for today. I hope you enjoyed this. We’ll be back next week with more charts.
Cheers,
Nick
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