Shifts in Cryptocurrency Markets

Nov 10, 2020

1 September 2020

Last week, the Chairman of the Federal Reserve J. Powell gave a speech outlining a change to the Fed’s inflation goals – instead of targeting 2% annually, they will now aim to achieve a longer-term average of 2%. This means that if inflation stayed below the 2% threshold for a few years, it will be allowed to run “moderately higher” in the coming years. The speech led to quite some volatility in both the dollar index DXY as well as the cryptocurrency markets.

Illustration 1: Powell’s speech (which started around 15:10 CET) impacted both crypto markets (BTCUSD, rhs, red/green 1-minute candles) as well as the dollar index (DXY, lhs, in black).

As mentioned in a previous episode, Bitcoin has shown an increased inverse correlation to the dollar index, including during its sharp shorter-term movements. If the correlation were to persist also over longer timeframes, that would strengthen the case for Bitcoin as digital gold and a hedge against inflation – retaining its purchasing power in the face of a declining dollar.

Declining Bitcoin Dominance Meanwhile, Bitcoin’s dominance in the cryptocurrency markets has shrunk, and ETH as well as other coins and tokens increased their share in the overall market cap.

Illustration 2: Since the beginning of July, Bitcoin dominance has declined from 63.8% to 56.7%, while Ethereum’s share of the total crypto market capitalization has increased from 9.5% to 12.4%.
Source:, Bitcoin Suisse Research.

Specifically, tokens related to decentralized finance are in part responsible for the decline of the Bitcoin dominance. The total market cap of DeFi tokens has reached $18 billion, or 4.6% of the total crypto market cap (at the time of writing). The rapid growth of the DeFi ecosystem continues, with total value locked currently sitting at almost $9 billion.

A Trip Down Memory Lane The cryptocurrency market landscape is constantly shifting. The winners of today may fade into irrelevance over time – as has happened with seven of the top 10 coins of 2013.

Illustration 3: Only 3 of the top 10 coins of 2013 still occupy a slot in the top 10 of today. Color code: Green = new or higher ranking, red = lower ranking, yellow = same ranking, grey = not in top 100 anymore today.
Source:,, Bitcoin Suisse Research.

While Tether did not increase in value from Aug. ’19 to Aug. ’20, it was included in the list to highlight the rising importance and prevalence of stablecoins.

A few observations from the table above are noteworthy:

  • The total market cap of the top 10 has increased by an order of magnitude every three years.
  • Bitcoin remained no. 1 throughout, and Ethereum and Ripple defended their no. 2 and 3 spots since 2016 (disregarding Tether).
  • Litecoin has continually lost relevance, but managed to remain in the top 10 since 2013.
  • Seven of the top 10 coins in 2013 and two of the top 10 coins in 2016 do not occupy spots in the top 100 of today anymore.

This leads to the conclusion that passively investing in the top 10 coins at any point in time to gain “diversified” exposure to the crypto markets may not be the best strategy, and historically, occasional rebalancing would have enhanced returns.

Correlations in the Top 20 Now, “diversified” was put in quotation marks because diversification across assets with high correlations is of limited efficacy. A correlation matrix for the current top 20 coins allows to identify those with low correlations to the “blue chip” coins Bitcoin and Ether.

Illustration 4: Of the top 20 coins, LINK, BSV, CRO, ATOM and OKB have relatively low correlations to BTC and ETH. Correlations based on daily returns with data since March 2019.
Source:, Bitcoin Suisse Research.

Of the top 20 coins, five seem to offer the possibility for diversification within crypto markets: LINK, BSV, CRO, ATOM and OKB. Nonetheless, correlations remain relatively high and positive, with the lowest ones being around 0.34-0.36 (for CRO and ATOM, respectively). A rising tide still seems to lift all boats, albeit to varying degrees. However, each coin or token offers a different value proposition, meaning fundamental aspects such as tokenomics, absolute valuation and future growth potential should be given at least equal importance relative to portfolio diversification desires.

One notable exception from this list of top 20 coins is Polkadot’s DOT (currently no. 6 by market cap), which has only started trading very recently and thus, no reliable conclusions can be drawn on its correlation to other coins. In its short trading history, DOT has shown a low correlation to both Bitcoin (0.26) and Ether (0.23).

The Importance of Trading Pairs One potential reason for the generally strong correlations in the cryptocurrency markets is the nature of trading pairs. Many coins and tokens either used to be or are still traded mostly against BTC or ETH. In the absence of USD trading pairs, this tends to correlate the USD value of the coin or token to the performance of BTC or ETH, and exacerbates downward pressure if altcoin traders wish to exit through a trading route of altcoin to BTC/ETH to USD.

Nowadays, many cryptocurrencies also have liquid USD (or USD-pegged stablecoin) trading pairs. This may lead to decreasing correlations over time. During strong BTCUSD sell-offs, however, correlations tend to be high – as is the case in other markets. As an example, during “Black Thursday” (March 12 of this year), ETHBTC (as a proxy for the altcoin market) remained constant or even sold off together with BTCUSD, meaning that ETHUSD declined by as much or even more than BTCUSD.

Illustration 5: During “Black Thursday” (March 12 of this year), ETHBTC declined slightly as BTCUSD sold off, indicating that ETHUSD declined slightly more than BTCUSD and was strongly correlated.
Source:, Bitcoin Suisse Research.

Conclusion In a world where central banks set out to do everything in their power to stoke inflation, potential stores of value such as Bitcoin seem attractive. Within crypto markets, however, Bitcoin’s dominance declined in the past months, and the Ethereum ecosystem (ETH as well as DeFi tokens) increased its market capitalization. While none of the new DeFi governance tokens has made it into the top 20 coins so far, the crypto landscape is continuously shifting, and only a few cryptocurrencies have truly stood the test of time.

The correlations between major cryptocurrencies remain high and make “true” diversification difficult, although the emergence of liquid USD or USD-pegged stablecoin trading pairs may decrease correlations in the future.

Bitcoin Suisse