Is Bitcoin’s dominance on the way out?

There is no doubt that Bitcoin remains the original cryptoasset in both the minds of investors and the uninitiated consumer.

At the time of writing, it accounts for 58% of the total market capitalisation of cryptoassets, with Ethereum coming in a distant second at 12%. Bitcoin looks hard to catch up with, however, it’s dominance in terms of market cap has been on a relatively steady decrease in 2020, having started the year at 68%. Questions are starting to arise about the coin’s future. Can it remain the dominant and authoritative force in the sector forever?

Given the speed at which new technologies are being developed, Bitcoin’s inability to adapt to the times and the explosion of new trends such as decentralised finance (DeFi) and proof of stake (PoS) protocols are leading some to speculate that we could be approaching the beginning of the end for the cryptoasset’s dominance.

The limits of the original crypto

Bitcoin was created with a specific purpose, to provide a decentralised currency that was free of central bank manipulation and government interference. Its creator Satoshi Nakamoto’s move into anonymity means that Bitcoin remains as it was the day it started, way back on the 3rd January 2009.

This lack of flexibility and inability to receive input from the creator, means that it is in danger of being left behind by other cryptoassets. Modern cryptos are able to adapt and improve when unforeseen issues arise, whereas Bitcoin’s technology generally remains static. That is not to say that improvements cannot be made, and the ongoing Lightning Network development is an example of this, but in general it is relatively inflexible and that counts against it in a rapidly changing world. Bitcoin evangelicals would highlight the benefits that come from an anonymous and non-interfering creator as this appeals to those in the cypherpunk movement, who value and advocate for anonymity and privacy as a route to social and political change.

However, this stasis is at the forefront of the minds of investors and enthusiasts alike. Hard forks of Bitcoin such as Bitcoin Cash and Bitcoin SV have displayed the ideological splits between enthusiasts, divergences which they believe are imperative given the creator’s reluctance or inability to bring the technology up to date.

The continued popularity of bitcoin has also caused spikes in pending transactions in the memory pool, and this increase in transactions carried out on the blockchain can bottleneck the system. As a result, users are becoming increasingly willing to pay higher fees to move their transactions ahead of others. This bottlenecking is antithetical to the origins of crypto, a financial system that is supposed to provide lower transaction fees than the current infrastructure offers. Whilst solutions such as the Lightning Network are working to address this hindrance on scalability, they have not yet garnered mainstream support.

Will the march of the alts halt bitcoin?

The last few months have seen a consistent downward trend in bitcoin’s market cap since the high of 67% on 11th May 2020, when the bitcoin mining reward halved. Investors on the eToro platform have recognised this trend. The total number of altcoin trades has been progressively increasing on the eToro platform over the last few months. In May, June and July, altcoins accounted for a progressively larger percentage of all cryptoasset trades, at 37%, 48% and 70% respectively, as many investors looked to capitalise on some coins’ eye-watering gains.1 Larger cap altcoins such as TRON and Binance have made excellent strides in performance this year. This performance has been recognised by retail investors on eToro, with investment in these coins increasing in August by 510% and 74%, respectively compared to July.2

The growth of DeFi could challenge bitcoin’s dominance

DeFi projects have the potential to change the way we use finance across the globe. Ethereum, in the midst of its own scalability upgrades as it moves from proof of work to proof of stake, offers a very real threat to the dominance of bitcoin as the potential excitement of decentralised applications (dApps) continues to gather momentum. ETH remains the second largest cryptoasset, and has seen a steady climb in 2020, accounting for 7% of total crypto market cap, hitting 10% halfway through the year and currently sitting at 12%.

The world is beginning to appreciate the powerful benefits that tokenisation can offer to the banked or unbanked.

Imagine a world where all assets, regardless of liquidity, are tokenised with a consistent and universal technical standard and their value can be bought and sold on the blockchain at any time, to anyone, anywhere. Tokens such as ERC-20 on the Ethereum platform are gaining in prominence, as they could potentially allow for interoperability between different systems and blockchains. As the value of these applications grows, so does the value of the underlying protocol, providing impetus for retail investors to move towards the relevant token – in this case, ether. Bitcoin is not able to partake in the huge growth in DeFi, and as a result such massive upward trends in the sector could threaten the cryptoasset’s dominance.

Dominance may wane but investor interest will continue

Despite these existential threats to bitcoin, it remains a key allocation in many investors’ portfolios. Whether that be of retail investors who entered the asset class during the 2017 bull run, or institutional investors, who have increasingly been making moves into crypto. Bitcoin is often regarded as a strong hedge against both inflation and central bank stimulus, and investors of all sizes are continuing to appreciate these hedging benefits.

Bitcoin must adapt – but will it?

Bitcoin is undoubtedly front of mind when consumers think about cryptoassets. However, this first mover fame may only carry it so far. Futurist and writer H. G. Wells presciently wrote ‘adapt or perish, now as ever, is nature’s inexorable imperative’, and this continues to be true, whether applied to nature, business or crypto. MySpace was once the pioneering social media platform, Napster used to be the dominant music streaming service and BlockBuster was consumers’ go to home film service. All failed to adapt and have now been surpassed. The same fate could await Bitcoin. Time will tell, but the current DeFi boom and the looming potential of platforms such as Ethereum pose a very real threat to the dominance of the world’s largest cryptoasset.

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