Opinion: Crypto Derivatives and DeFi Expansion May Shake Bitcoin’s Market Dominance

The market structure of cryptocurrencies is changing, and Bitcoin’s dominance as the premiere cryptocurrency has declined.

When people talk about cycles in the cryptocurrency industry, they usually start with some cyclicality in the nature of prices, most often described by the S2F model used for other commodities. However, the cyclicality that is often overlooked is the average user of cryptocurrencies who comes for Bitcoin, then looks for the ‘next Bitcoin’ along the risk spectrum, but ultimately still comes back to the idea that ‘Bitcoin is the best cryptocurrency’.

My own journey started on a similar path, I got into cryptocurrencies to learn about bitcoin, then moved to bitcoin cash, and finally came back to bitcoin. It’s easy to see why bitcoin is the only asset people expect to own. In 2017, when most assets were having gaping liquidity issues, bitcoin was trading at a high level. in 2018, when most other assets were shrinking by 90%, bitcoin’s shrinkage was not as severe. But what about today?

In this post, I’ll highlight some of the biggest market structure changes in the Bitcoin narrative and why the playing field has become very level.

We love commenting on derivatives, and we won’t ignore their importance to Bitcoin maximalism in 2018 and beyond. Contrary to popular belief, the most important factor in Bitcoin’s success may not be the concept of perfection or security, but rather the fact that the derivatives market favors Bitcoin in a very interesting but often overlooked way, essentially pushing (Bitcoin) maximalism into the market.

When BitMEX’s perpetual swap (perpetual swap) dominated in 2018, it offered a unique way for traders to trade by pledging, profit/loss, and having products available on Bitcoin exchanges. The trade became the most liquid product on the market by a wide margin, and soon BitMEX dominated the vast majority of price discovery as well. At the same time, we saw Bitcoin’s dominance double as funds, venture capital groups and cryptocurrency companies actively hedged their risk by trading BTC BitMEX with Bitcoin as margin.

Opinion: Crypto Derivatives and DeFi Expansion May Shake Bitcoin's Market Dominance

This advantage in terms of liquidity, trading volume and uptime made BitMEX an early home for derivatives trading and allowed it to enter a new market: ALT (cottage coin)/BTC. when ETH/USD Quanto went live in May 2018, we saw the price of ETH drop dramatically, partly because traders were able to trade ETH/USD with BTC collateral for the first time (previously only ETH/BTC was available). What most traders didn’t realize was that this was the first step in unintentionally becoming Bitcoin maximalist, as all gains and losses (P&L) were denominated in BTC.

Opinion: Crypto Derivatives and DeFi Expansion May Shake Bitcoin's Market Dominance

It doesn’t matter what contract you’re trading: being a Bitcoin-denominated exchange means that everyone is after one thing: namely Bitcoin. The reason Bitcoin held up best in 2018 wasn’t purely because it was the most valuable, but because it was the most widely traded, liquid product and the preferred product to trade on BitMEX. This argument is circular in some ways, but liquidity and volume invites liquidity and volume, and the best traders and funds will always run to the markets that already exist and reduce counterparty risk.

In short, as the entire market shifts to swaps with bitcoin as margin, the entire market shifts to bitcoin as king. In many ways, it’s unlikely to happen again in 2017/2018, and a strong argument can be made that Bitcoin’s dominance has peaked forever because there are now a wide variety of structured products that people can trade in virtually any base currency. In other words, the market’s adoption of mass fiat curbs the need to use bitcoin as a sole asset and even opens up the possibility of deposing the ‘king’ BTC.

Cryptocurrency Exposure
Perhaps second only to fiat margin derivatives, fiat’s direct access to the cryptocurrency market allows the world to bypass one of Bitcoin’s main unintended value propositions: the intermediate layer between fiat and cryptocurrency. As the cryptocurrency market expands in size, so does the accessibility of the cryptocurrency spot market. In the U.S. alone, users can board a dozen exchanges to trade the spot cryptocurrency market in a relatively short period of time. In addition to the ready-made market for mining large, there has been a huge shift to using fiat currencies (primarily USD) for spot trading instead of bitcoin pairs.

Opinion: Crypto Derivatives and DeFi Expansion May Shake Bitcoin's Market Dominance

Take for example the ETH/BTC and ETH/USD pairs in the Cryptocurrency Spot Market. Over the past two years, the ETH spot market has completely fragmented as the volume of fiat currency trading has completely dwarfed the bitcoin pairs. Bitcoin’s function as the primary gateway into cryptocurrencies has disintegrated as more markets have been created and liquidity has shifted to the fiat spot market. A quick look at the difference in trading volume between DOGE/USDT and BTC/USDT on Coinan is also evidence of this trend, as DOGE has been trading more than Bitcoin over the past few weeks.

In addition to this exposure, the cryptocurrency market has benefited from the institutional adoption of the asset. Grayscale, Purpose ETF, CME Futures Market and Bitwise have all reached out to massive players entering the space – yet these products no longer just cater to bitcoin alone. Since the CME announced ETH futures and Grayscale’s addition of ETHE trusts, ethereum has accounted for roughly 20% of the cryptocurrency’s futures and trust size. The narrative of Bitcoin as the only institutional crypto asset has been completely dismantled and institutions have begun to explore the possibility of other cryptocurrencies (i.e. ETH) becoming part of ETF applications and corporate treasury purchases.

DeFi and the Future of Cryptocurrencies
DeFi is probably the most important long-term driver of cryptocurrency valuation, and it is the most valuable future prospect for cryptocurrencies. A year ago, the concept of DeFi was far less accessible than we know it today, but the proliferation of liquidity mining / yield farming has propelled DeFi to become the darling of the industry. In the span of a year, we’ve seen the amount of value in DeFi (total locked-in value) rise from $700 million to $91 billion and counting, a full 100+x increase.

Opinion: Crypto Derivatives and DeFi Expansion May Shake Bitcoin's Market Dominance

For now, there are more than half a dozen Layer 1 blockchains worth more than $1 billion looking to swallow Ether’s moat. What this rapid expansion shows is not only the accumulation of value for DeFi in the short term, but the collective outlook for the ecosystem in the long term. While Bitcoiners claim that DeFi will eventually be built on top of Bitcoin, the reality is that Bitcoin’s architecture simply cannot support many of the DeFi features already available on Ether. What is missing from this view of the cryptocurrency’s future is Bitcoin’s role as an industry leader and where Bitcoin will find its value-added role to the DeFi ecosystem.

In a market where the largest assets trade at high volatility, it is difficult for even the best assets to withstand changes in the system. Bitcoin, the most popular asset, has the largest following, however, when digging into the reasons why, we are challenged with the real support versus structural forces as to whether Bitcoin will be able to maintain its dominance. In the wake of the expansion of the derivatives market, the increase in cryptocurrency exposure, and the birth of DeFi, Bitcoin’s dominance as the premiere cryptocurrency has declined and may never maintain its old position as the only true cryptocurrency.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/opinion-crypto-derivatives-and-defi-expansion-may-shake-bitcoins-market-dominance/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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