Ecoinometrics - September 23, 2020

Keep your eye on the ball...

The cryptocurrency market is full of innovations.

You used to have ICO everywhere. Now DeFi is all the rage and maybe NFT is the next “big” thing. Shiny new things all the time.

But with a token for everything and eye popping returns on recently launched coins, things can be a bit distracting. So my advice is: keep your eye on the ball...


The Ecoinometrics newsletter decrypts Bitcoin’s place in the global financial system. If you want to get an edge in understanding the future of finance you only have to do two things:

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And here the ball in question is of course Bitcoin. 

The current Bitcoin market cap is about $200 billion. As I have discussed in a previous issue of the newsletter this is big but not that big.

By that I mean that you have to consider the use case. Bitcoin is an aspirational store of value. It is digital gold. But at the moment its market cap is just on par with the one of large international corporations.

The target for Bitcoin is not to compete with Visa. It is to compete with gold as the best store of value available. That is a several trillion dollar market not just a few billion.

Now that we have established that Bitcoin is competing with gold, the question is: are there any other competitors out there? 

And usually at this point in the conversation is when you have people starting to shill the latest coins with all their bells and whistles, waving that the Bitcoin dominance is down to only 60% and so on…

Hold on! Take a step back.

First of all the Bitcoin dominance is not that meaningful. To see what’s going on you have to dig into what’s in the crypto market.

Take the top 50 cryptocurrencies by market cap and look at the ratio of the market cap of each coin to the market cap of Bitcoin.

Already Ethereum which is the second largest cryptocurrency is only a fifth of the size of Bitcoin. 

From there things fall very fast. Even if you combine the market cap of the top 15 cryptocurrencies it all amounts to only 50% of the market cap of Bitcoin.

See for yourself.

And when you go past the 15th position all that remains is really a long tail of dust. Past that point, none of the remaining cryptocurrencies have a market cap above 1% of that of Bitcoin.

I haven't counted them all, but there are hundreds of coins out there. Most of them are worthless simply because of the fact that they have not reached a critical size to benefit from a powerful network effect.

From that it should be clear that the potential competitors to Bitcoin in the cryptocurrency ecosystem are few. 

They are even fewer when you consider the value proposition of Bitcoin vs the other cryptocurrencies that have reached a non-negligible market cap.

Bitcoin is boring. But Bitcoin is stable, does exactly what it is supposed to do, is battle tested and has scale.

I don’t think anybody really believes that Ethereum or Ripple are competing with gold as sound money...

Does that mean you can’t make any profit by investing in other coins? Sure you can. 

At least if by investing you mean making momentum plays on smaller projects and moving your profits back to BTC aggressively… this kind of sport is not for everyone though.

Just check out the chart below:

  • Each point is a cryptocurrency.

  • From left to right the market cap is increasing (log scale).

  • The colour scale gives you the growth in the past 30 days.

  • For the 0% colour just look at Tether (USDT). Lighter colours are negative growth and darker colours are positive growth.

Unsurprisingly even when BTC is pretty quiet you can find opportunities to trade momentum in small market cap assets (below $1 billion). 

But the long term game is to accumulate Bitcoin. That’s where the true wealth is. So keep your eye on the ball.

And talking about the ball, what is it doing this week?

Well, not much I’m afraid. BTC is basically bouncing back between $10,000 and $11,000.

When we look at the activity on the CME futures it is clear that traders are bored by this price action. The traded volume hasn’t been very high over the past week and there hasn’t been any massive change in open positions.

Looking at that you wouldn’t think that the September contract expires at the end of the week.

The rollover is in progress but it has been pretty slow.

And while the time spreads tend to increase significantly on the days leading to a contract expiration this isn’t the case this time. The buying pressure is not there.

The story is very similar on the options side with very little activity ahead of Friday. There are 3 calls for every 2 puts on the near month and 3 calls for every 1 put overall.

If BTC remains around the same level until the end of the week we are set to get:

  • 9,325 BTC worth of contracts expiring which is 35% of all the positions.

  • 25% of the calls are in the money which is higher than usual.

  • 15% of the puts are in the money which is also higher than usual.

But that’s probably due to the wide range in which BTC has traded over the past 3 months more than anything else.

The Commitment of Traders report is dated September 15 and it shows two things:

  • Retail traders have resumed net buying with more than 1,000 new long positions.

  • The smart money is just doing nothing at the moment.

Actually that’s true only when you look at the smart money in aggregate. Because if you split this category between leveraged funds and asset managers you can see that these two are playing a different game:

  • Asset managers are increasing their net long exposure to Bitcoin.

  • Hedge funds are very much net short as they continue to milk the basis trade.

That’s it for today. If you have learned something please subscribe and share to help the newsletter grow.

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And don’t forget to stack sats!

Cheers,

Nick


The Ecoinometrics newsletter decrypts Bitcoin’s place in the global financial system. If you want to get an edge in understanding the future of finance you only have to do two things:

  1. Click on the subscribe button right below.

  2. Follow Ecoinometrics on Twitter at https://twitter.com/ecoinometrics

Done? That’s great! Thank you and enjoy.