Why Bitcoin Dominance Is at 70% - Ep.89

Transcript

Hi, everyone. Welcome to Unconfirmed, the podcast that reveals how the marketing is in crypto are reacting to the week's top headlines and gets the inside scoop on what they see on the horizon. I'm your host, Laura Shin. If you aren't receiving my weekly email newsletter, go to unchainedpodcast.com to sign up. And don't forget that Unchained and Unconfirmed are now on YouTube. You can go subscribe there to be alerted to all the latest episodes of both podcasts. CypherTrace cutting edge cryptocurrency intelligence powers anti-money laundering, blockchain analytics, and threat intel. Leading exchanges, virtual currency businesses, banks, and regulators themselves use CypherTrace to comply with regulation and to monitor compliance. Today's guest is Jan Lieberman, co-founder at Delphi Digital. Welcome, Jan. Thank you for having me. Excited to be here. I want to

discuss Bitcoin dominance, which is at 70% of the total crypto markets, more than double of its low of about 33%, which was at the height of the crypto bubble in January 2018. Why do you think the dominance has risen that much? It's been a combination of things. And initially it starts with, you know, the the that peak happens and then there's the spillover and massive sell off and you have this consolidation. And so, you know, that takes a couple of months and after a while, the space gradually matures, but you still have a lot of these projects that exist that are very far from developing or far from delivering anything that they're developing. And a lot of the times, even what they're working on, that doesn't necessarily

translate to a situation where their tokens can accrue value. So you still have a lot of situations where many tokens are so massively overvalued and at the same time, you're losing incremental. You don't really have the incremental buyer that you had before. So what you saw at the end of 2017 was, was kind of peak euphoria as retail was coming in and you're hearing everyone, you know, asking what's the next token and, and everyone's, you know, in hindsight talks about how that was an obvious sign. But what that really means is, you know, the incremental buyers there were retail who were looking to buy high and kind of sell higher. And the issue is that that doesn't really exist anymore. So, Every incremental dollar coming into the space, I think the percentage of money coming in that's retail is significantly smaller than what

we saw at the end of 2017. So you do have more institutional money coming in now. And not to say that there's a lot, it's a very gradual process, but the money that is coming in, there is considerably more of it now than there was before. And if you think about institutional investors, there's a lot of mandates that they have to follow and And there's a very lengthy due diligence process in most cases. And what that does is it kind of removes the ability to start to really dive, to invest in a lot of these other very speculative coins. So what happens is a lot of these investors, as they're starting to learn about crypto, it's very hard to kind of educate them about the space. And it's a very gradual process and it'll kind of continue for a while. And what you start to

realize is The narrative for Bitcoin and kind of understanding how it accrues its value is a lot easier to understand. And, you know, in layman's terms, it starts with just a digital option on gold. And then you can kind of explain the narrative going forward and how that can develop further. But that's, you know, that's step one. And then you have to realize everything after that, whether it's Web3 and anything else, it becomes increasingly harder. So you start to realize that a majority of the money coming into the space is going to really have to focus on some of the more favorable risk reward opportunities and Bitcoin certainly fits that bill. And so you have a majority of the money coming into the space, focusing on Bitcoin at the same time. So what that causes you start to lose the incremental buyer for a lot

of these all coins. And at the same time, individuals who are in the space, you kind of have to assume that, you know, the people that are in the space now as a whole, the space is a lot more knowledgeable than it was two years ago. So people start to, realize part of it is kind of, you know, just Darwinism, where the people who are just sitting in some of the riskiest stuff have kind of been burned and are no longer interested. And that's totally fair. But what happens is now you have the individuals that are in the space are also starting to realize, all right, well, the incremental dollar is going to be coming into Bitcoin for the most part. So it makes a lot more sense for me to kind of sit in there, sit in that space to take advantage. And so

you kind of have to realize that you know, there's certain amount of elements that you need to kind of create a quote unquote alt season. And one of them being retail investment and the other being a diminishing risk return profile for Bitcoin. And that's what you kind of saw with where Bitcoin topped in mid to late December. And then those two, three weeks afterwards was when you really saw the dominance tank was, you know, Bitcoin hit uh, the high teens and people start to realize I can't really get that multiplier. So you have retail and you have greed that kind of kicks in and starts to venture further out into the risk spectrum in the crypto space. And so when that happens, that's when you kind of see dominance fall. But afterwards, after, you know, the whole space kind of,

um, collapses and, and, and consolidates, then it starts to kind of flow into quality. And so you, we, we've seen minor, um, dips in, in dominance, uh, For example, one in March was the most recent and the most significant, I'd say. And that was right before Bitcoin really took off. So what happened was the space kind of understood that it was starting to bottom, but Bitcoin wasn't really moving as much. And so the risk reward kind of shifted towards more of these altcoins. And so there was more of a search for risk. And then as soon as Bitcoin started taking off April 1st, alt really never stood a chance. You did have a few individual ones that took off and did well. And there's a few that exist

now that have kind of even maintained or improved their price versus Bitcoin just based on how they're structured. But for the most part, it's been a flow to quality and just understanding that you're not really going to have that kind of massive search for returns until we probably see new Bitcoin all-time highs. And I know that there are a couple of factors that Delphi Digital looks at that involve unspent transaction outputs, also called UTXOs. So what can you glean about Bitcoin's price from UTXOs and this other factor that you look at, which is a UTXO adjusted variation on the NVT ratio, which is defined as the network value to transaction signal? Absolutely. And so what we do with these UTXOs is we

can use their age. So whenever Bitcoin's moved, the new UTXO is created. And so you kind of use every time it's moved as a proxy for buying and selling. And so- And just for people who maybe don't know, a UTXO is kind of like the change, right, from a transaction. Like if I'm spending, you know, like a $20 bill on a $10 thing, and then there's $10 of, you know, change left over, that's sort of- the idea for UTXO, is that right? Right, and that's kind of how the ledger works, where it measures the portion of your holdings that weren't spent. So you basically, all of it flows to one place, and then the portion that's not spent comes back. And so that unspent portion is

now the new UTX, that's the existing one, and then the new one is created when it's sent. So it's kind of how the ledger, how it works. And so by understanding the age of each one, you can, approximate when the last time it moved. And so by doing that, especially on an aggregate level, you can understand different pockets of Bitcoin's age. And what that gives you an understanding of is how long, you know, longer term holders have been holding and whether or not there's been a lot of a lot of movement in the in the underlying quantity of coins. And so what are you seeing in that regard? And so what we're seeing is is that a lot of the long-term holders still are kind

of continuing to hold. And so it was something that we were able to, it was, it was helpful to kind of understand when the, when the bottom would come in, because you, you'd know, you'd understand that, all right, a lot of these long-term holders have really sold off and you see them sell off as the price peaks. And as it comes down, because, you know, they've, they've held for three to five years or five or five years and more, and they've seen these cycles and they kind of understand how they play out. And so once you kind of see, that these individuals have sold off, you start to realize that there's not a lot of, um, sell pressure coming in. And so that kind of helps create the bottom because now you need incrementally less demand to, to offset the selling that's naturally happening from,

from minors and then from these long-term holders. So by understanding, um, the actions of the long-term holders, it can, uh, give great, you know, directional sentiment on, um, what expectations are. And so what we've been seeing, especially recently, is that a lot of the selling has been occurring from short-term holders. So a lot of individuals who've kind of acquired within the past 12 to 18 months, partially because, you know, 12 to 18 months, they're finally hitting breakeven levels. And there's certain psychological elements to, I've been underwater for a while and I'm, you know, I'm excited to finally get out.

Or there's also just a lot of underlying trading going on. But the main takeaway is that while you do have these, these volatile price moves, the longer term holders have, have continued to hold. And you're, you're starting, you saw the accumulation kind of occur earlier this year and it's held strong. And so the idea is that the, the price action recently has been dictated by short term traders and not necessarily long-term holders that, that are either, you know, just trying to cash out or, or have had different plans and kind of are giving up for example, which, you know, if you think about how long they've been holding and the understanding of the space you had to have at the time to have the conviction to invest, the idea

here is that they see the upside because they've been in a lot longer. And so you're able to kind of understand that these short-term price moves are dictated mostly by traders. And it's not this large exodus like you kind of saw at the end of 2017, where we did see a lot of these long-term holders cash out and for the most part to rebuy or at least partially. And so what it does is it creates, it gives, it creates a level of comfort and understanding that, you know, the short-term price action is just that, and it's not necessarily the start of a new bear cycle, you know, just because we've peaked at 14.

And so this is more of a consolidation stage rather than any kind of long-term reversal. All right, so we're going to discuss some of the other technical factors, I guess, or technology related factors probably is a better way to put it. Because I'm suddenly realizing technical means a very specific thing when it comes to trading. Anyway, we're going to discuss that all in a second. But first, a quick word from the sponsors who make this show possible. Will the world follow France and advocate banning privacy coins? Will government backed stable coins become the new fiat? Are distributed and peer-to-peer exchanges just a flash in the pan? The answer is maybe.

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Back to my conversation with Jan Lieberman. So for a long time, people have been discussing is maybe a euphemistic phrase for what's been going on around scaling in Bitcoin. But the solution right now looks to be building on layer two. How is that effort going right now and what effect is that having on the Bitcoin price? Sure. It's been developed. Lightning is developing. It's developing slowly. And I think what really helps with Bitcoin is that In the near to medium term, the ability to scale on layer two isn't mandatory. So Bitcoin can be very successful for quite some time before layer two scaling is really necessary, partially because it's not

supposed to be this medium of exchange immediately. The idea is that it's a non-correlated, non-sovereign store of value. And the value is in security and it's immutability, not so much in the capacity to transact quickly right now. And so while lightning is developing slowly, Bitcoin definitely stands to benefit from the fact that there isn't this immediate need to scale. And so the fact that, you know, lightning is developing, but not as rapidly as some people might have hoped.

the impact on price is minimal just because it's it's not really crucial to its value at the moment and and probably not for the foreseeable future and on a related note there was a report by electric capital recently on developer activity in the crypto space and i had the author of that report maria shen on the show and at that time uh because the report noted that ethereum's developer community was by and large but was far and away the largest. And if I remember correctly, I think it was like maybe about 3X something that a Bitcoin, like 1200 developers or something over 400. I should check that and I'll add a little thing if my facts are not wrong or not correct. But anyway,

at the same time, Ether's price has not really gone up. And in fact, you know, Bitcoin dominance really has pulled away while ether so far this year has just languished in the 100 to 200 range do you have a theory as to why its developer activity and its price seem to be disconnected absolutely and it's i think it's a combination of things so initially you have to think about what really drove ether to hit those 1400 plus levels and a lot of that was the ico fueled mania which created direct demand for ethereum as the ico's fundraise then subsequently led to massive selling as they had to liquidate to you know uh for for fundraising reasons and so that was one reason where you kind of see

this massive sell-off despite the the rampant development um that's going on and then the other issue is that there there isn't a direct translation from developer to to price in this situation so while there may be more individuals developing on ethereum ethereum has some significant short-term headwinds and the fact that it does need to really scale in order to kind of even achieve significant value in the short to medium term, which is kind of something that Bitcoin, again, benefits from not being restricted to. And wait, and so why does that matter for Ethereum when it doesn't matter for Bitcoin?

Sure. So in order for Ethereum to really gain value, it needs to have a thriving ecosystem of functioning dApps and explicit use cases. And DeFi is growing on Ethereum, definitely, but you're still seeing just a couple percent of Ethereum locked up in DeFi. And so that's not going to create enough kind of a velocity sync to help bring prices up. So in order for Ethereum to truly scale and have the underlying transaction throughput, to kind of achieve this level, then it needs to scale. And so what scaling allows us to do is, you know, part of what drives value is

the fact that you having a significant on-chain volume. And so with the on-chain volume, that leads to gas fees. And that's what really drives value, especially once we move to proof of stake is kind of what's going to be, what's the yield that you can earn by staking Ethereum. And that's going to be very dictated by these gas fees. And so in order for there to be enough throughput, you need the scalability and the scalability will lead to hopefully functioning dApps. But the issue is, you know, you're going to have a lot of these developers, but that doesn't necessarily directly translate to value accrual. And at the same time, you have a lot of these tokens that are building on Ethereum. And there's some elements of economic abstraction where, you know, they're being used as collateral versus Ethereum. And it makes sense because, you know,

in order for that token's use case to work, they do have to function as a collateral in order to help create some kind of stability in the underlying, you know, the value of the collateral. And so while that kind of hinders Ethereum a little bit because now other tokens are abstracting the value that would have been attributed to Ethereum in the sense that Ethereum would have been used as that collateral. And so while Bitcoin can kind of, you know, function as the store value and benefit from security and it doesn't necessarily need to have this massive throughput for now. Ethereum is a bit handcuffed in the sense that it's trying to do something considerably more difficult. And that's definitely a fact. Web3 is

very complicated and that whole idea is very difficult. And in order to do that, there needs to be scaling. And until that really happens, it'll be difficult for there to be enough natural demand for Ethereum through its use to create some kind of upward price momentum. Yeah. So basically, Bitcoin doesn't necessarily need usage for the price to go up, but Ethereum does. And even then, in a way, almost because of its flexibility, the quote unquote Turing completeness of the system, some of that flexibility can also even take away some of the value of the ether, which is really interesting. So there are actually all these other developments in crypto that I think could also affect the price of Bitcoin. Obviously, Facebook is potentially launching Libra

soon. China is on the cusp of releasing its own cryptocurrency. And then I don't know if anything will happen of this, but the Bank of England Governor Mark Carney floated the idea of a global digital reserve currency. How do you think any of these factors will affect Bitcoin? I think for the most part, they will have a positive impact. And part of that is because what they're doing doesn't really cannibalize Bitcoin's value. Bitcoin's value comes from the fact that it's immutable, it's uncensorable, and it's a non-sovereign. So you can't really issue more. So the fact that there's this fixed schedule, so you kind of know what you're getting. Whereas with these, whether it's with Libra or creating a digital

version of fiat currencies, the underlying issues are still there where there's still gonna be, inflation will kind of continue. It's gonna be the case. There will be considerable, issuance. And so the issue is that you kind of have to, you know, while they're both digital in that respect, the value accrual mechanisms vary. And so what I think the benefit will be is that you're going to have a lot more individuals comfortable with the idea of a digital asset. And there will be considerable wallet integration, which will make those that aren't necessarily interested in Bitcoin or, you know, don't have easy access to it, they'll honestly just create a bridge to that access. And you kind of

saw that initially with Ethereum where, you know, Ethereum brought a lot of interest to the space and a lot of that value ended up accruing to Bitcoin. And I think what will happen here is this will, it'll just make individuals more comfortable with the idea of a digital asset, what it means, how to use it, how to transact, because even, even now, you know, the UI is still not there. Everyone is worried when they have to type in, you know, the, public key and to send Bitcoin anywhere. And so there are these concerns, you still, you know, cross your fingers and hope everything works. And so until that's remedied, until you can really see, until you can basically use it without having this concern where it just functions as seamlessly as everything else, this kind of on-ramp of new users will always be a benefit.

And so having individuals more comfortable with these assets is definitely going to be a plus. Yeah. By the way, that point you mentioned about how you can type a wrong character and lose all your Bitcoins. This was a point that quote unquote Hamilton made in the crypto rap battle that Reid Hoffman released this week. And it's an amazing video. You guys should check it out. I have a very tiny, tiny cameo, but it's super fun. All right. Well, thank you so much, Jan. It's been great having you on the show. Really appreciate your time. Thank you very much for having me. Thanks so much for joining us today. To learn more about the topics we discussed, be sure to check out the links in the show notes of your podcast player. If you enjoyed this episode, be sure to share it on Facebook, Twitter, or LinkedIn. Unconfirmed is produced by me, Laura Shin, with help from Factor

Recording, Anthony Yoon, Daniel Nuss, Rich Trafalino, and Josh Durham. Thanks for listening.