Over the past 12 months cryptocurrencies with a large market cap have been largely outperforming those with a small market cap – so much so that bitcoin’s dominance is flirting with the 70% mark.
Data from MVIS CryptoCompare Digital Assets Indices shows that in the last 12-month period, a basket of large cap cryptocurrencies went up by over 37%, while baskets of medium and small-cap cryptocurrencies dropped 52.5% and 46.37% respectively.
Not only is #bitcoin holding steady as many top #altcoins slide, but the gulf between large-cap and smaller-cap altcoins is getting even larger as Q3 2019 progresses. @MVISIndices @gaborgurbacs pic.twitter.com/jnMW8mEHEX— CryptoCompare (@CryptoCompare) September 13, 2019
There are several factors that could explain why cryptocurrency enthusiasts are betting on large-cap cryptocurrencies such as bitcoin and Ethereum’s ether, instead of in little-known tokens - that could see their value rise far more than the better known assets.
Bear Market Recovery
One of the main dynamics that’s likely also contributing to the rise in bitcoin dominance is the bull-bear market of 2017 and 2018, which saw some cryptocurrencies hit a new all-time high, to only then drop by well over 90%.
Verge (XVG) offers an excellent example. In the last 12 months, the cryptocurrency fell over 70% against Tether’s USDT stablecoin, dropping from a ₮ 0.0015 high to around ₮ 0.0042 at press time. If we take into account its ₮ 0.3 all-time high, the drop is even more significant.
As the market is full of cryptocurrencies that have at some point been compromised because of an attack – even Ethereum Classic suffered an attack this year – investors are naturally turning to cryptocurrencies that have a proven track record. Bitcoin, for example, has been around for a decade and although bugs have been discovered, it’s never been compromised.
Initial Coin Offerings (ICOs) were all the rage back in 2017. A lot of great projects were funded selling their own tokens to retail investors. Brave’s basic attention token (BAT), for example, saw its token sale end in under a minute, and is now offering users a browser with an advertising model looking to compete with that of Google.
One cryptocurrency, called the Useless Ethereum Token, raised thousands of dollars. It noted it was the first ICO to “transparently offer investors no value” and added it “might be secure” but was “definitely not audited.” The token’s homepage even said:
Seriously, don't buy these tokens.
Yet thousands of dollars were used to buy Useless Ethereum Tokens. As the ICO bubble inflated more as more projects kept appearing. Once the bear market arrived in earnest - many ICOs were forced to dump their ETH reserves to survive, or lay off staff.
This meant that ICOs that weren’t outright exit scams or just simply couldn’t pull off what they promised, struggled to stay afloat. The result were depreciating tokens, further sinking the medium-cap and small-cap indexes.
Small Cap Doesn’t Mean Bad
All of this isn’t to say a small-cap cryptocurrency is necessarily a bad one. While some would correctly point out they can be compared to penny stocks and are much riskier than large-cap coins, there are potentially good projects to be found..
Cryptocurrency exchanges like OKEx have started launching tokens through their platforms through what’s known as an initial exchange offering (IEO). While some of these projects have seen their prices drop right after the initial sale, as they’re vetted by companies who’ve proven their worth they’re likelier to stay for the long run.
As a result of this the tokens of the cryptocurrency exchanges themselves have seen their prices rise. OKEx’s OKB has outperformed most other cryptocurrencies in the last 12 months, as its price surged by over 100% in this period.
Shinobi Capital has estimated the OKB token could see its value grow by over 1,500% until 2020, as the firm believes exchange tokens are going to be the “powerhouse of the development of the digital asset market and even blockchain technology.”
Keep in mind, however, no one can see into the future and while small cap cryptos do present profitable opportunities, large-cap cryptocurrencies have proven they’re here to stay. A smart portfolio in the cryptocurrency space will almost certainly include a bet in bitcoin and other large-cap cryptocurrencies, with a small percentage allocated to these projects