Bitcoin and Ether, the giants of the cryptocurrency market, currently account for over 60% of its total market capitalization, surpassing the combined value of all other coins. However, this lack of diversification poses a significant concentration risk. Any significant decline in the performance of Bitcoin and Ether has a ripple effect that impacts the entire market.
To counterbalance this dominance and mitigate the associated risks, it is crucial to establish a robust infrastructure that allows for the introduction of sustainable tokens. Unfortunately, this has been challenging due to the reliance on centralized exchanges that lack transparency. These exchanges often operate without requirements for proof of reserves, effective liquidity management, or sufficient due diligence.
Recent events have highlighted the dangers of this approach. To address these risks, we require improved infrastructure emphasizing transparency and sustainability. Instead of relying on exchanges like FTX and Alamedas, we need market makers and exchanges that enable token issuers to make independent decisions.
Market-making plays a vital role in this scenario. Innovative forms of market-making have emerged, enabling smaller tokens to enter multiple markets and enhance diversity. This reduces concentration risk and increases liquidity while freeing token issuers from opaque third-party intermediaries.
The readability of Bitcoin and Ether significantly contributes to their dominance. Investors easily understand and analyze these assets, capturing their interest with predictability and transparency. Additionally, their high liquidity facilitates efficient trading.
However, the dominance of BTC and ETH also poses a challenge. With only two assets commanding more than half of the market capitalization, investors often hesitate to invest in smaller coins or assets. This lack of portfolio diversification perpetuates the dominance of Bitcoin and Ether, creating a concentration risk. Adverse events or regulatory actions affecting these dominant cryptocurrencies have far-reaching consequences on the entire crypto market, as observed in the FTX collapse 2022.
Excessive volatility further compounds the challenges. Recent collapses of Terra-LUNA, FTX, Silvergate, and Silicon Valley Bank have demonstrated the devastating effects of prolonged instability on the market, with slow recovery times. Such downside risks erode investor confidence and industry credibility. The asymmetrical impact of volatility in BTC and ETH also hinders market recovery, as prices tend to drop more rapidly than they rise.
This excessive volatility discourages large funds and investors from actively participating, reducing liquidity. Moreover, the extreme volatility of cryptocurrencies limits their adoption in traditional financial applications like loans, mortgages, and insurance. To prevent another liquidity crisis and address these issues, the crypto market requires innovative market-making practices and technological advancements prioritizing transparency and sustainability.
The dominance of Bitcoin and Ether is a symptom of a larger issue—insufficient autonomous market infrastructure. Smaller tokens face challenges in maintaining trading volumes, resulting in limited resources for blockchain infrastructure and reduced liquidity. This lack of transparency and stability forces issuers to rely on external exchanges and market makers, relinquishing control over their tokens’ market performance.
To rectify this situation, investing in technology and infrastructure that promote transparency, autonomy, and sustainability is essential. Such advancements would enable token issuers to monitor their assets and trading activities in real-time, enhancing the readability of their assets. This investment would drive diversification, restore market stability, and align with the fundamental values of trustlessness, safety, decentralization, and equitable access that underpin the crypto industry.
Increasing the number of tokens alone does not solve the concentration risk, volatility, and reduced liquidity. Quality remains paramount, prioritizing tokens with value and purpose. Nonetheless, empowering token projects and communities with greater visibility and agency, allowing them to operate without intermediaries, can revolutionize the market. By attracting more investment, these tokens could challenge the dominance of BTC and ETH, leading to a stronger and more diverse cryptocurrency market that benefits investors, the industry, and society as a whole.