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Bitcoin is losing ground in crypto market and is subject to law of large numbers

Relevance up to 12:00 2022-01-22 UTC+00

According to Kraken Intelligence’s Crypto-in-Review report, the crypto market had a huge disparity in returns last year, with Shiba Inu amassing a return of 41,800,000%, while bitcoin recorded a return of just 58%.

And while these numbers may seem high compared to traditional financial assets such as the S&P 500 index, it is important to note that bitcoin was the third largest of the top 20 cryptocurrencies, well below the average return of 646%.

Bitcoin loses ground in crypto market in 2021

In its 2021 Crypto-in-Review report, Kraken Intelligence found that overall the market ended 2021 with a 187% gain. And while that pales in comparison to the 310% return in 2020, it still far outpaces the 58% return in 2019.

As a beacon of the broader crypto market, bitcoin’s performance is always seen as an indication of the actual state of the market. Like every year for the last 4-year market cycle, the major cryptocurrency has outperformed most traditional financial assets such as the S&P 500, the NASDAQ, gold, government bonds and high-yield bonds.

However, while bitcoin showed returns that are unlikely in the traditional financial market, its 2021 performance looks bleak compared to the rest of the cryptocurrency market.

Bitcoin is third-worst performing crypto-asset in 2021

Kraken’s report looked at the top 20 cryptocurrencies by market capitalization, excluding stablecoins. It found that bitcoin was the third-worst performing asset.

Litecoin’s extremely modest 16% return made it the worst asset in the group, while Bitcoin Cash returned just 26% and was the second worst on Kraken’s list.

Not surprisingly, Shiba Inu took the lead of the year, dethroning Dogecoin from its throne as the king of memecoins. Launched in 2020, Shiba Inu generated an astronomical 41,800,000% return in 2021.

The top 20 cryptocurrencies by market capitalization showed an average return of 2,240,000% and a median return of 646%. However, when excluding Shiba Inu and its unprecedented jump in returns, the average and median readings drop to 2,524% and 454% respectively.

Law of large numbers count against BTC

Bitcoin, which was once the main driver of all market movements, seems to have faded into the background in 2021. One of the biggest impediments to the major cryptocurrency’s significant growth this year has been the law of large numbers. It states that an asset cannot sustain the same growth as its market capitalization increases.

“The ebb and flow of market participants favoring altcoins over BTC and vice versa could help explain short- and medium-term market shifts,” Kraken Intelligence reported.

Bitcoin’s dominance declining: hedge coin among cryptocurrencies

A deeper look into bitcoin’s position in the crypto market also reveals another interesting trend, the declining dominance of bitcoin.

2021 started with bitcoin’s dominance sitting under 70%, that is, 70% of the entire crypto market capitalization was locked in the main cryptocurrency. However, shortly after the year began, bitcoin entered a 5-month downtrend that ended in June, when its market dominance fell to 39%.

According to Kraken Intelligence, this downtrend coincided with a broader market sell-off in May, which led to several months of slow BTC recovery.

Throughout the second half of 2021, bitcoin’s dominance was largely range-bound between 40% and 50%. This is the result of a rather interesting phenomenon. The majority of market participants see bitcoin as a safe-haven asset within the crypto ecosystem.

This view of the major cryptocurrency means that most traders tend to trade back into bitcoin to preserve their wealth and avoid the drawdowns that hit altcoins the hardest.

*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.

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