Monetary premiums, can altcoins compete with Bitcoin (BTC)?
Dash and Bitcoin Cash experience significant downswings away from the mean which indicate an inability to retain a firm monetary premium over time. By far, Bitcoin Cash has the poorest behaviour, reaching only 36% growth above the mean, once. It can be argued that, Bitcoin Cash may be reasonably discounted as an asset that does not have a monetary premium and is thus unattractive as any form of scarce fixed supply money.
Bitcoin and Litecoin have seen typical variations from the mean on the order of -1,000% to -2,000% during bear markets and similar to the other coins (excl. Bitcoin Cash) have seen 90%+ upside premiums over the mean line. Given the expected volatility of fixed supply, nascent crypto-assets, I consider this a reasonable benchmark, especially considering Bitcoin (BTC)s
The standout coin in this study however is Decred. Not only has Decred retained its monetary premium more than twice as long (relative to lifespan) as Bitcoin, it has retained this premium through much of the 2018 bear market with a remarkable maximum negative deviation of only -226%. That is 10x smaller drawdown in monetary premium when compared to Bitcoin with a typical -2000% deviation.
This suggests that Decred has attracted the strongest monetary premium of all assets considered in this study. This is a likely result of the underlying demand for proof of stake ticket holders and participation in Decreds governance system which is soon to account for 50% of available DCR supply. This is an additional source of validation that ticket demand (and thus demand for ownership and participation in the protocol) is a reliable source of buy support and a strong influence on the perceived scarcity of DCR.
It is an interesting contrast to Dash which utilises a Masternode governance system that requires a lockup of 1000 Dash coins to participate (~$160,000 at time of writing). This may be a significant barrier to entry by the widest cross section of people, especially in comparison to Decred’s ticket system which currently requires around 120–130 DCR ($3,600 — $3,900) with the added ability for ticket splitting for smaller holders. Further research into these mechanism as a driver for coin demand and perceived scarcity may shed light on the difference in performance.
This study makes the assumption that Bitcoin’s organic growth and high conviction signal have carved out the ‘centre of gravity’ for the relationship between stock-to-flow ratio (scarcity) and human perception of value as expressed through price. Bitcoin should therefore be considered the benchmark against which all crypto assets competing for a monetary premium should be assessed.
The alt-coin mania of 2017 and relatively short lifespan of altcoins is likely to skew data to some extent and thus it is likely that study of each coins S2F-value relationship in isolation is not representative. This assumption must be revisited periodically as additional market cycles play out.
By comparing the data from five large cap fixed supply crypto-assets Bitcoin, Litecoin, Bitcoin Cash, Dash and Decred, we can reasonably establish whether an alt-coin monetary premium is developing with respect to Bitcoin’s ‘centre of gravity’.
It is reasonable to conclude that Bitcoin has by far the most organic and undeniably important monetary premium, arguably of any financial asset.
Based on this study, Litecoin has shown performance similar to Bitcoin however with less conviction and it remains to be seen if it can retain this premium into the future. On this basis, there is little advantage to holding Litecoin in place of Bitcoin for any purpose other than speculation.
Similarly, I remain hesitant regarding Dash as a store of value candidate given the heavy downside swings and overall persistence below the power law mean. Further study into the mechanics of Dash’ issuance schedule and incentive structure as a driver for scarcity may shed light on this performance.
Bitcoin Cash is clearly unable to retain a monetary premium and may be safely disregarded as a monetary asset on the basis of this dataset and analysis.
Decred has shown by far the most interesting and promising performance with a remarkable ability to retain its monetary premium over time. What is most important is that in all metrics assessed in in this study (life above mean and monetary volatility), Decred has performed significantly better than Bitcoin itself which is likely of great interest for assessing potential store of value candidates.
Decred’s observable high performance suggests that DCR may be developing a convincing monetary premium and is something that I believe is largely undervalued by the market today. However, given the fundamentals behind Decred are extremely close to those of Bitcoin, although with notable areas of differentiation, it is quite likely that DCR will attract substantial interest if this monetary performance continues, liquidity grows and the market catches on.
CM.
Published at Tue, 09 Jul 2019 19:57:41 +0000
