With 2019 now closed out, it is a great time to reflect on the trends of the last 12 months and start looking forward to the next year. The crypto market is in constant evolution and so much progress is being made across protocol development, financial infrastructure and regulations that it is hard to keep track of it all.

Reflection on 2019

For me personally, 2019 acted to shift many of my internal narratives and mental models for the cryptocurrency industry that I developed through 2018. Early in 2019, I commenced my journey down the Bitcoin rabbit hole in earnest after becoming disillusioned with the idea of a multi-coin future.

I never left.

Bitcoin dominance grows

We established back in Q1 that it was likely that money would continue to flow out of low tier altcoins and into BTC and a select few projects of quality. Overall, we have seen this play out with Bitcoin decimating the altcoin space in terms of yearly gains, liquidity and increasing market dominance. The chart below was something I drew early in 2019 where I expected at least 70% dominance to return.

The value of low end altcoins has continued to bleed away. Market interest in anything outside the top 50 has waned away to almost nothing given the lack of developments, drying up of liquidity and failure of projects to deliver anything of value.

Willy Woo built the chart below showing how altcoins in general have all trended to losses or near zero gains versus BTC since 2018. He also highlighted that there are two classes of alt-coins a) Oscillators and b) Degenerators.

Degenerators represent the majority of altcoins that trend in one direction vs BTC…down. Never hold a degenerator.

Oscillators are coins which oscillate around BTC in terms of gains. Meaning that when BTC gains value, these coins also tend to gain value in terms of BTC through market cycles. These are the projects to keep an eye on and includes projects like ETH, XMR, DCR and even DOGE….These are coins that have shown some semblance of real value either as a speculative asset of simply a leveraged trading instrument. These are network effects.

DEFI gains traction on Ethereum

Hard to ignore this one, it is truly quite remarkable the growth of DeFi in 2019. In fact, DeFi barely existed at the start of the year. It was largely dominated by MakerDAO which was only in early stages and a bunch of barely used protocols like Augur.

Many new exchange protocols like Uniswap, Kyber network and DyDx are live and functioning with fairly significant volumes.

Money markets like Compound, Maker and DyDx are reaching new heights in terms of loans and interest bearing assets issued. In fact the amount of ETH locked in some kind of DeFi application is in an extremely convincing uptrend which is a strong indication that demand exists for this technology.

DeFi is not without its risks and limitations however including relatively centralised setups, backdoors and regulatory uncertainty. However one cannot expect perfect decentralisation out the gate and a risk of regulatory crackdown is not necessarily a reason not to innovate and experiment with permission-less infrastructure.

Expansion of derivatives

This has been a massive development in market structure this year and one I strongly expect to continue moving forwards. Volume on derivates exchanges like BitMEX, Deribit and FTX eclipses spot volumes now which has lead to massively increased volatility in the intra-day timeframes. Given the availability of 100x leverage (or 125x on Binance…), there is a strong incentive for large players to build massive futures positions and then manipulate the less liquid spot price to their liking.

The chart below shows the open interest on BitMEX. It can be seen that at the 100k BTC open interest, it usually precedes strong moves that liquidate traders. In fact the BitMEX liquidation fund has now reached 0.2% of the entire BTC supply.

Stop hunts on BitMEX are common where price screams upwards (liquidating longs) before rapidly reversing and screaming to the downside (liquidating shorts) until returning to the original price. In fact this phenomena become so common it even has a nickname in trading circles…

The Darth Maul candle. Double wick, no body. Arthur Hayes (CEO of BitMEX) is laughing.

We have also seen the growth of options markets and increased financial products for traditional investors. Outside the US, ETFs and similar are being built for Bitcoin. A major impact here is that Bitcoin is becoming increasingly entrenched in financial institutions. The more infrastructure and businesses are built around the technology, the harder it will be to outlaw and shut it down without banning legitimate businesses.