There has been a lot of fear in the cryptocurrency market since Sam Bankman Fried’s digital asset exchange FTX collapsed, so much so that digital assets have been separated from the risk resurgence in traditional markets.
However, bitcoin’s (BTC) dominance rate, or the cryptocurrency’s share of the total cryptocurrency market, is consistently around 40%, which contrasts with its record of soaring during times of stress.
According to observers, the stagnant dominance rate represents a number of developments, including investors exiting the market.
“BTC hasn’t turned negative in recent months, so investors no longer see it as a safe haven,” Wes Hansen, director of trading and operations at crypto fund Arca, said in an email.
“More broadly, the events of November 2022 have shaken many investors’ confidence in the space. In previous periods, investors have moved into BTC to protect downside during market downturns. But given the scale of this year’s scandals and their far-reaching implications , many investors are not moving into BTC because they are simply leaving the space altogether,” Hansen added.
With forks in every nook and cranny of the cryptocurrency market, the collapse of FTX was the biggest in a string of major cryptocurrency failures this year, bringing down several firms, including cryptocurrency issuer BlockFi.
Bitcoin has the most liquidity and is the least volatile of all cryptocurrencies except stablecoins. Therefore, cryptocurrency investors tend to move money into BTC when they feel less confident about the overall market situation.
Investors sought refuge in bitcoin in the first half of this year as the Federal Reserve’s hawkish turn and the implosion of Terra led to a collapse in the broader cryptocurrency market. The safe-haven offering for Bitcoin raised its dominance rate from 39% to 48%. A similar strike was observed in May and June 2021, as well as in the bear market of 2018.
However, that is not happening this time as traders are switching to cash. According to Hansen, registered investment advisers were the largest group of people fleeing the cryptocurrency market.
The cryptocurrency market is maturing
According to Richard Rosenblum, co-founder of cryptocurrency trading firm and co-founder of liquidity provider GSR, holding stablecoins — cryptocurrencies with values tied to a foreign reference such as the U.S. dollar — is a better option for investors.
“There are a lot of risks, including macro markets and the perceived risk of keeping cryptocurrency on an exchange, post-FTX. Moving to stablecoins is the most defensive position compared to moving to BTC, which is ultimately still a volatile asset,” Rosenblum told CoinDesk. he said when asked if he was replacing BTC as his market’s safe haven.
However, Rosenblum cautioned against reading too much into the dominance ratio, as it is normal for people to leave the market amid a prolonged price wave and does not mean the end of the world for cryptocurrency.
“Looking at dominance as a metric in and of itself is an oversimplification. In 2017 or 2018, it made a lot more sense. Now there are more components in how both crypto and other asset classes and events impact the space,” he said.
Bitcoin no longer represents a major part of the development in the cryptocurrency industry, as it was in 2018 and before. Exactly four years ago, at the peak of the 2018 bear market, bitcoin’s share of the total cryptocurrency market was 59.4%, compared to 40% at press time.
Noelle Acheson, author of the popular Crypto Is Macro Now newsletter, echoed a similar sentiment in a note sent to subscribers over the weekend.
“BTC may not have outperformed other cryptocurrencies because investors have largely left the market instead of turning to relative safety,” Acheson said.
Acheson added that the strange behavior of bitcoin’s dominance rate during the market downturn indicates that the market composition is changing for the better.
“Bitcoin is still the leading asset by the widest margin, but its hero’s volatility is weakening. It’s a sign that the asset class is maturing. That it’s clear in one of the darkest times is reason for hope,” Acheson said.