Bitcoin’s market dominance falls to 38% as crypto asset trading grows

• Global cryptocurrency market capitalisation surged amid the strong demand from both institutional and retail investors
• The ranking of top 10 cryptocurrencies has changed constantly
• Cryptocurrency has been increasingly accepted by mainstream financial industry

The global cryptocurrency market capitalisation quadrupled in 2020 and soared by 172% from $0.78 trillion at the end of 2020 to $2.12 trillion on 19 May 2021, on the back of strong market sentiment. Demands from both institutional and retail investors have surged and  an increasing number of institutions have entered the crypto market.

Cryptocurrency has become more mainstream despite the high volatility and warnings on cryptocurrency risks. The direct listing of cryptocurrency exchange Coinbase in April 2021 marked the broader acceptance of cryptocurrency by mainstream financial industry and fuelled the continued rally behind it.

The recent volatility in cryptocurrency prices has been largely triggered by Tesla's announcement on 12 May that it would suspend accepting Bitcoin as payment for its vehicles due to concerns over energy consumption. The electric vehicle company began accepting payments in Bitcoin in March. Meanwhile, three Chinese state-backed financial associations issued a joint statement reiterating that financial institutions and payment companies are not allowed to provide cryptocurrency services on 18 May. Consequently, the value of the cryptocurrency market tumbled 18% from the record high of $2.59 trillion on 12 May to $2.12 trillion on 19 May.

Top cryptocurrencies

Among more than 7,300 cryptocurrencies tracked by CoinGecko, there were 18 cryptocurrencies with market capitalisation of over $10 billion on 19 May 2021, compared to four at the end of 2020. The 10 largest cryptocurrencies in terms of market capitalisation had a combined market share of 75.8%, down from 88.6% at the end of 2020. While Bitcoin and Ethereum have remained the top two largest cryptocurrencies since 2016, the ranking of top 10 cryptocurrencies has changed constantly due to high volatility.

Bitcoin represented 37.8% of the total cryptocurrency market capitalisation on 19 May 2021, compared to 68.8% at the end of 2020. Although its market capitalisation was still 105% higher than that of Ethereum, the second largest cryptocurrency, its market dominance declined due to stronger growth of other cryptocurrencies. Bitcoin is used as a store of value and a medium of exchange and some investors purchased it as an inflation hedge, as its supply is limited to 21 million.

Ethereum strengthened its position as its market share has increased significantly to 18.4% on 19 May 2021 from 11% at the end of 2020. Ethereum is different from Bitcoin as it is also an open-source blockchain network that allows other applications to be built. The rise of decentralised finance (DeFi) and non-fungible tokens (NFTs) have contributed to the strong growth of Ethereum. DeFi applications typically run on the Ethereum blockchain and NFTs are notably bought and sold using Ethereum. Meanwhile, the surge in its price has been bolstered by the anticipation of technical adjustment called EIP (Ethereum Improvement Proposal) 1559, which is expected to overhaul Ethereum’s fee structure and go live in July 2021.

Binance Coin has overtaken cryptocurrencies such as Tether and Ripple’s XRP to become the third largest cryptocurrency. It was launched with an initial coin offering by Binance cryptocurrency exchange in July 2017. Its market capitalisation almost doubled in April 2021, partially fuelled by Coinbase’s public debut

Dogecoin, the sixth largest cryptocurrency, experienced a sudden surge in price. Unlike Bitcoin, Dogecoin has no hard supply cap. Since the start of 2021, its price jumped from $0.0047 to an all-time high of $0.68 on 7 May 2021, before plunging to $0.34 on 19 May 2021. Its market capitalisation surged from $7 billion to $40 billion in April 2021 and doubled in the first week of May.

Dogecoin spiked in popularity and price following comments on social media from celebrities such as Tesla CEO Elon Musk and Dallas Mavericks owner and billionaire investor Mark Cuban. Meanwhile, the wild surge was also fuelled by the support from two cryptocurrency exchanges - eToro and Gemini. However, some view it as a speculative bubble as its use case remains limited. The proponents of Dogecoin aim to push its price to $1.

Growing cryptocurrency adoption

Many companies hold cryptocurrencies on their balance sheet to earn a higher return. MicroStrategy, a business intelligence company, holds approximately 91,579 bitcoins that are worth $3.4 billion based on price on 19 May 2021. Square also owns 8,027 bitcoins that are worth $299 million based on price on 19 May 2021. When Square invested in Bitcoin in February 2021, its total Bitcoin holdings represented about 5% of its cash and cash equivalents at end of 2020. In comparison, Tesla’s $1.5 billion purchase of bitcoins amounted to about 8% of its cash and cash equivalents when it was announced in February 2021.

Bitcoin became an important part of Square’s revenue mix, accounting for 48% of total revenue it generated in 2020. The company saw its Bitcoin revenue jump ninefold year-over year to $4.57 billion in 2020 amid Bitcoin boom, while its Bitcoin gross profit climbed twelvefold year-over-year to $97 million.

Companies such as Square and PayPal offer services to those who are interested in purchasing cryptocurrencies. Square was the first public company to allow transactions of bitcoins via its payment platform. More than three million Cash App users transacted in Bitcoin in 2020, while more than 1 million users purchased bitcoins for the first time in January 2021. PayPal launched a new service that enables its customers to buy, hold and sell Bitcoin, Ethereum, Bitcoin Cash, and Litecoin directly from their PayPal account in October 2020. Its weekly cryptocurrency purchase limit was up from $10,000 per week to $20,000 per week in November 2020, and about half of PayPal’s crypto users open its app every day. 

More companies from a variety of industries have started to accept cryptocurrency as a form of payment due to the growing demand for alternative payment solutions. Swiss clients of insurance giant AXA have been allowed to pay premiums for its non-life insurance products in Bitcoin since April 2021. Microsoft, Starbucks, Expedia, and WeWork are also among the companies that accept payments in cryptocurrencies. In addition, Visa started to accept cryptocurrency to settle transactions on its networks.

In response to the surge in demand for cryptocurrency services, more financial institutions are also beginning to incorporate cryptocurrencies into their businesses. BlackRock added Bitcoin futures as an eligible investment in two of its funds in January 2021. Morgan Stanley offers Bitcoin funds to its wealth management clients who have at least a $2 million portfolio with the company. Goldman Sachs also announced to provide its wealthy clients with Bitcoin exposure. Goldman Sachs relaunched the crypto trading desk and executed its first cryptocurrency trades in early May 2021.

The crypto custody firm NYDIG and technology solutions provider FIS are partnering to enable US banks to offer their customers the ability to buy, sell and hold Bitcoin within their existing bank accounts in coming months. Hundreds of smaller US banks have agreed to participate, according to NYDIG.

Although the uncertain legal status hampers the growth of cryptocurrencies, their adoption is increasing. More financial institutions have either been involved in the crypto business or shown interest in launching crypto-related services, bringing cryptocurrencies into the mainstream.