17th August, 2021 — Dr. Raffael Huber

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The crypto markets have recovered some of their early summer losses with strong rallies across the board, despite potential regulatory troubles coming from the U.S. as well as a large DeFi exploit occurring. A rising tide lifts all boats – but still, there were many differences in performance among the almost 9’000 coins and tokens now listed on CoinGecko, for example. While each coin/token has its own properties and belongs to separate projects, many can be attributed to a larger sector or to a certain ecosystem.

Thinking in sectors may help to more easily identify which type of token performs well in certain market conditions – the following paragraphs will explore some examples of possible sectors, with representative tokens for each. How did each sector perform over the past month?

Base layer coins

Base layer coins are used as the native currency on the respective blockchains to pay for block space, and in some cases also fulfil governance functions or are used as a means of payment for purchasing goods and services. The largest examples by market cap for this sector are BTC and ETH.

Illustration 1: Bitcoin (red) has rallied over 40% during the past ca. 30 days, while ETH (blue) managed to outperform it by ca. 20%.
Illustration1
Source: tradingview.com

 

DeFi tokens

This sector includes tokens related to decentralized finance – most applications have issued their own token (and distributed, for example, through yield farming) and use it to govern the protocol. While other blockchains, like Binance Smart Chain, have picked up some market share, the largest protocols by total value locked mostly exist on Ethereum.

Illustration 2: Over the past 30 days, UNI (pink), AAVE (purple) and MKR (green) have performed similar to BTC and ETH, with UNI being the strongest performer of the three.
Illustration2
Source: tradingview.com

 

Blockchain-specific ecosystems

Another possibility to look at sectors is to group them by the underlying blockchain. By size, the largest ecosystem by far is Ethereum – supported both by older 2017 ICOs that managed to survive through the 2018-2019 bear market, as well as newer DeFi/NFT platforms. However, many other ecosystems exist – for example Polkadot (with DOT and KSM as the largest representatives by market cap) or Solana.

Illustration 3: Both DOT (black) and KSM (pink) have recovered strongly since mid-July, with DOT being the better performer of the two.
Illustration3
Source: tradingview.com
Illustration 4: Two representative tokens from the Solana ecosystem, SOL (purple) and SRM (light blue), have been among the strongest performers over the past month, with SOL being the first major coin to reclaim its previous all-time high.
Illustration4
Source: tradingview.com

 

Storage coins

Another sector of coins with a targeted use case are storage coins, such as Filecoin or Arweave. Other examples that would fit into this category include Siacoin (SC) and Swarm (BZZ).

Illustration 5: FIL (blue) has slightly outperformed BTC over the past 30 days, while AR (black) managed to outperform FIL by more than 2x.
Illustration5
Source: tradingview.com

 

NFTs and gaming

NFTs have become an important sector of the overall crypto economy – yet their overall market capitalization or performance is hard to grasp. Tokens such as AXS or “floor punks” might be suitable indicators for the sector as a whole – both have performed tremendously in the past 30 days, with AXS being up +183% and the cryptopunk floor price up +224%.

Size of sectors

Looking at the share of various sectors in the overall crypto market cap, it is still largely dominated by base layer coins – each coin in the current top 10 can be attributed to this category, with the lion’s share coming from BTC and ETH (combined $1.25 trillion or about 62% of the total crypto market cap). Growth rates between sectors differ – recently, we saw a large increase in NFTs, and it is often the case in the crypto markets that these happen in waves as the attention of shorter-term speculators shifts. As such, looking back at last year, the “DeFi summer” preceded Bitcoin’s massive rally, which in turn was followed by a markup period for many altcoins.

Where is the attention now?

Over the last 30 days, crypto prices have risen strongly – but, as shown in Illustration 6, some sectors managed to outperform.

Illustration 6: During the last 30 days, the NFT and gaming sector as well as coins from the Solana ecosystem managed to outperform other sectors. Data from 16 July to 16 August afternoon.
Illustration6
Source: coingecko.com, Bitcoin Suisse Research.

 

Over the past 30 days, NFTs attracted a lot of the attention, and – more recently – the Solana ecosystem as well. In general, altcoins have outperformed Bitcoin during this period.

Are coins in the same sector correlated more strongly?

The question arises whether coins attributed to a certain sector are correlated more strongly to each other than to the overall market or to BTC.

Illustration 7: Correlations within sectors (black boxes along the diagonal) generally seem to be higher than to the overall market – for example, the DeFi tokens all show correlations >0.8 to each other over the past 30 days.
Illustration7
Source: coingecko.com, Bitcoin Suisse Research.

 

Over the past 30 days, this seems to have been the case in general. For example, DOT showed a higher correlation to KSM (0.813) than to any of the other cryptocurrencies examined. The exception was Arweave and Filecoin (AR outperformed strongly), where FIL has shown a higher correlation to the overall market. AXS and floor punks also appear to have unique price action. This makes sense, since cryptopunks might act more as a general bet on the NFT market, whereas AXS is seen as a bet on the blockchain gaming market. They both show low correlations to the rest of the market (despite cryptopunks mostly being priced in ETH!).

Conclusion

There are, of course, many other ways to categorize tokens into sectors, and sectors will also often overlap – as an example, a sector including all smart contract platforms would have a large overlap with base layer tokens and at least one common element with blockchain-specific ecosystems (the native currency of the network). Nonetheless, such a classification can be useful to identify market cycles and quickly gauge which sectors are outperforming.

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