The Bitcoin dominance cycle suggests that the 2017 crypto rally could repeat itself

For the sake of historical comparison, it should also be noted that the dominance chart pattern is currently similar to what it was at the beginning of 2017.

As the markets have collapsed since May 12, the dominance of Bitcoin (BTC) has fluctuated dramatically, bucking the prevailing trend of 2021. Before the sell-off began in earnest, BTC dominance was around 70% in January to a low of decreased fairly steadily below 40% at the time of the crash. At this point, BTC dominance was at its lowest level since summer 2018. Since then, it has rebounded to over 43%.

If the same pattern is going on this time, the market should be in line with summer 2017, when the old season was just kicking off, and a few months away from Bitcoin’s peak of around $ 20,000 in December 2017.

Of course, while the patterns draw some interesting parallels, the BTC dominance doesn’t necessarily say that much about price. However, it does provide insights into the performance of the flagship wealth versus the rest of the markets and underpins certain trends. What are the likely scenarios for BTC dominance and what would that mean for the markets?

Follow the flow of money

The cash flow model is a potential predictor of where the markets could go. The model says money flows from fiat to bitcoin and then from large caps to mid caps to small cap altcoins before being routed back to BTC and finally back to fiat.

This model is interesting because it pretty much sums up what happened in 2017, except that the cycle played out twice when BTC spiked towards the end of the year. If the scenario repeats in 2017, BTC dominance could continue to increase until the flagship hits another price spike, and then fall as the old season accelerates again.

In addition to the uncanny similarities of the dominance diagrams, the behavior of the old markets also offers indications that they could develop according to historical cycles. In early May, Cointelegraph reported that altcoins had flipped their previous cycle in support – a move that last happened in 2017.

If the cycle repeats, legacy markets could still reach new stratospheric highs in 2021. While the performance seen in May may not offer much certainty in this regard, there is still no evidence that BTC and the broader markets will not perform on long-term trends. Sam Bankman-Fried, CEO of Exchange FTX and Alameda Research, told Cointelegraph:

“If we enter a sustained bear market, I would expect BTC dominance to rise like it did in 2018-2019; But the correction we’ve seen so far isn’t enough to trigger this. “

But wait…

For individual investors who want to keep track of the flow of money, there is a big consideration. Speaking to Cointelegraph, Robert W. Wood, managing partner at Wood LLP, warned, “The elephant in the room for diversification is taxes.” He added, “By 2018, many investors could claim that exchanging one crypto for another under Section 1031 the tax code is not subject to tax. However, the law was changed in late 2017. “

Indeed, Omri Marian, director of the Graduate Tax Program at the University of California’s Irvine School of Law, confirmed that crypto-to-crypto transactions are likely to trigger tax obligations, telling Cointelegraph:

“Every reading of one crypto-asset for another is a chargeable event. Regardless of the profit motivation, a cryptoassets investor must consider the fact that realigning the portfolio can result in tax costs. “

Shane Brunette, CEO of CryptoTaxCalculator, put it into practice, telling Cointelegraph, “If an investor switched between BTC and Altcoins, the capital gain / loss would be realized in that fiscal year, regardless of whether it was paid out or not.” fiat. “He also clarified that” the activity would reset the length of time the investor held the asset, which would affect eligibility to apply for a long-term capital gain discount. “

So keep in mind that tracking the flow of money can come at a cost of its own. Therefore, there is no guarantee that the pattern will repeat itself as new variables can have an impact.

The unknown crowd

The most critical difference between 2017 and now is the presence of institutions in the markets. At least this applies to Bitcoin and to some extent to large-cap altcoins such as Ether (ETH). Large parts of the old markets, including almost all low-cap coins and memecoins such as Dogecoin (DOGE), are dominated by retailers and investors.

Studying the dominance charts, BTC appeared to be getting a boost in late 2020 when institutional interest in cryptocurrencies began to surge. Their dominance continued to grow until around January.

However, there is evidence to suggest that the institutes may be behind the recent surge in BTC dominance. On May 21, it was revealed that whales had purchased $ 5.5 billion worth of BTC while prices were below $ 36,000. Two days later, crypto hedge funds MVPQ Capital, ByteTree Asset Management, and Three Arrows Capital confirmed that they were Dip buyers.

So there is a possibility that Bitcoin’s sudden recovery in dominance was not due to regular market cycles but was influenced by institutional whales that are taking in discounted BTC.

Risk-off, but how far?

The question is, how much will institutional involvement affect BTC dominance patterns compared to 2017? Perhaps the most critical difference between institutional and retail investors is that institutions are more likely to follow prevailing market conditions and take risk accordingly. Hence, BTC dominance is increasing as investors move away from risky alts.

Connected: Long-term? When Bitcoin crashed, institutions held on

However, based on the “Buy the Dip” reports, there doesn’t seem to be any reason to believe that investors – at least for now – are taking the risk of crypto itself that far. In addition, bullish sentiments continue to swirl, undeterred by the market chaos of the past few weeks, as reports suggest that interest in BTC appears to continue to grow.

Hence, there is still a chance the cash flow model will re-impact if interest in BTC persists and no major bad news comes in to destroy sentiment around crypto. If the story is set, BTC dominance will continue to increase for the time being before investors expand back into large-cap altcoins.