So You Want to Trade Crypto — Market Cap Distribution and Rise of Altcoins (Part 4)

Bitcoin dominating >90% of the total value of the market to <40%

From the start of 2016 to the end of 2017, we’ve gone from Bitcoin dominating >90% of the total value of the market to <40%.

This flow of capital has lead to a boom in alternative Cryptocurrencies, which offer newer technologies and wider use-cases.

Market Cap Misconceptions

The first point to address is the issue with market capitalization as a metric when applied to Cryptocurrency. For a stock, the market cap is calculated as:

Price per share * shares outstanding

Which makes sense, as each share represents a stake in the assets and profits of the company. This same calculation is applied to Cryptocurrencies:

Price per token * tokens available

This starts to cause issues due to the ease that a new token can be made and added to one of the dozens of small exchanges.

If someone creates a new coin with a total supply of 100B and manages to get it listed on a small exchange and trades it a few times with their friends for $1 per coin, it technically has a market cap of $100B. But in reality, is has no true value and no trading volume to sustain any kind of selling pressure.

Maintaining an artificially inflated market cap

Adding to this, there are many coins that do have significant daily trading volumes while maintaining an artificially inflated market cap as the majority the of the supply is locked up by developers and isn’t tradeable. This raises serious questions about how the investors and traders price in total supply of a token and whether the theoretical value of a project lines up with reality.

Many people also misunderstand what market capitalization means in terms of capital flow.

A market cap of $100B does not mean that $100B has been invested into the token, as shown earlier. Nor does a token’s market cap changing from $100B to $150B or $50B mean that $50B of capital has changed hands.

Not enough money in the system to redeem every token

The profit from a Cryptocurrency investment should be treated as “paper gains” until cashed out or hedged — there is simply not enough money in the system to redeem every token to anywhere near the value of its market cap.

Despite this, for a Crypto with sufficient trading volume and age, market cap can be useful for rough comparison, but make sure to always take it with a grain of salt.

Shift in Market Cap Distribution

(Market Cap Values from coinmarketcap.com)

As we can see, the last few years have not been kind to Bitcoin’s historical dominance of the Crypto market, with many new projects taking off in the first half of 2017.

For many years, Bitcoin has held onto its “first mover advantage”. However, political issues surrounding the development of Bitcoin caused a slow down in advancement — creating a void for a multitude of altcoins to fill.

Result of “ICO Mania”

Over the past year this new crop of development has accelerated, with smart contract platforms taking many of the top spots. 2017 also saw the rise of “ICO Mania”, with dozens of new tokens and projects gaining investment from speculators looking for yet higher yields on their equity.

In the long term, Bitcoin will likely continue its decline in market share, as its older technology simply cannot compete with new offerings. As long as the political issues surrounding development continue, this will not change. Bitcoin made for an excellent proof of concept, but if it can’t adapt, it risks becoming the Myspace of the Crypto world.

Trading the Altcoin Boom

With altcoins making consistent gains in market share and the relative stagnation of Bitcoin development, Bitcoin is likely to drop from the top spot over the next couple of years (if not sooner) in favour of a newer generation Cryptocurrency.

This shift will likely see a huge change in the attitude and composition of the market as a whole, as everyone tries to pile into the new top coin and related technologies, so that they can ride the hype train.

As always, it is best to keep a level head and stick to your trading and investment strategies. A firm understanding of the underlying technology and use-case of a wide range of Cryptocurrencies will serve well in positioning yourself to take advantage of this shift.

There are a wide variety of projects which all have their use-cases

While smart contract focused Blockchains are some of the leaders at the moment, in the long term their value and success will be measured by the applications and businesses that run on top of them. Meanwhile, we shouldn’t forget the other uses of Blockchain, such as ledgers for supply chains, auditing or even Internet of Things devices. There are a wide variety of projects which all have their use-cases.

Cryptocurrency investments should be managed like a stock portfolio. You wouldn’t place your entire value into a single stock, similarly you shouldn’t be overly dear about a single coin. A well balanced holding of different projects across different areas can help hedge against black swan events in the market while profiting from the broad growth of Crypto as an asset class.

by Matthew Tweed

Thanks for reading! Please follow Alpaca and Automation Generation for fresh posts on Financial Market, Algorithmic Trading, Technology. You can find us @AlpacaHQ, if you use twitter.

If you’re a hacker and can create something cool that works in the financial market, please check out our project “Commission Free Stock Trading API” where we provide simple REST Trading API and real-time market data for free.

Brokerage services are provided by Alpaca Securities LLC (alpaca.markets), member FINRA/SIPC. Alpaca Securities LLC is a wholly-owned subsidiary of AlpacaDB, Inc.