Thread by @santimentfeed

1. Everyone tracks the ETH market cap, but what about the market cap of all ERC-20 projects? Does it correlate to ETH, and how?

We tried, but couldn’t find the combined ERC-20 market cap ANYWHERE.

So we built one. From scratch. And we learned some new things about ETH: (thread)

2. Disclaimer: The following thread is NOT investment advice. This research was conducted for informational purposes only. We do not offer investment advice and nothing we say should be construed as investment advice.

3. Our method:

To calculate and graph the entire ERC-20 market cap over time, we crunched data from all ERC-20 projects currently in our database (app.santiment.net).

The result - our very own (and possibly first?) composite ERC-20 market cap, over time:

4. If you’ve been obsessing over Ethereum’s market capitalization in the past year or so, the above graph will probably look familiar.

Here are the two market caps (ETH and ERC-20), over time, plotted together:

5. Few things become immediately clear:

As expected, the ERC-20 market capitalization appears to move pretty similar to the ETH market cap (more on this in a moment).

But another - more interesting trend - is also visible.

6. As you can see, the two market caps continue to move closer together over time.

The reason for this, however, is *not* a gradual increase in the ERC-20 market cap.

Instead, it is because of a *progressive decline in the ETH market cap* - especially in the last 9 months.

7. We also wanted to see how the ERC-20 market developed over time, specifically as a % of the total ETH market cap.

As it turns out, the growth of the ERC-20 market relative to the ETH market cap seems to be constant – almost linear:

8. Although the growth of the ERC-20 market cap is undeniable, we are looking at the market capitalization, and not average price development.

So this growth is likely propelled by *new projects entering the market, rather than existing projects increasing in value.*

9. The most interesting results, however, were when we took a look at the correlation between the ERC-20 and ETH market caps.

How to read this graph:

1 = ETH and ERC-20 market caps move alike
0 = they move completely independently
-1 = they move move in opposite directions

10. Despite frequent tremors, correlation btw ETH and ERC-20 market caps always seems to bounce back close to 1, with an overall correlation of 0.78

But, we can also spot some *extreme spikes* – especially during 2017 – where correlation drops clean to 0 or even turns negative.

11. The correlation increased during the 2018 bear market, and stayed high for most of the year (minus last few months)

This indicates that correlation btw ERC-20 and ETH market cap tends to be *lower in the bull market, and higher/more volatile in the bear market*

WHY is that?

12. We can only theorize here. So here’s our theory:

In a typical bull run, everyone’s looking for that one project that will moon next. This leads to at least some amount of rsrch and value-based investing, causing *strong differences in the performance of some projects.*

13. On the other hand, during a bear market, many fairweather traders don’t care which projects are built on solid foundations and which aren’t – they just want out.

As a result, there’s a *significant lack of project differentiation* during a standard bear market.

14. This is precisely in line with our recent findings about low-correlation portfolios, where we discovered that assets with low correlation to the rest of the market *performed very well* during the 2017 bull run.

Link to that analysis - santiment.net/blog/is-divers…

14. Still, you wouldn’t call ‘correlation volatility’ between ERC-20 and ETH market caps a bullish signal. Especially since the correlation dropped once again recently, and we’ve yet to see clear signs of market recovery.

15. However, following the massive FUD at the start of 2018 – we may be witnessing an increase in more selective project valuations, which is hopefully a sign of a maturing market.

Whether this trend continues given the current market turmoil remains to be seen.

16. You can read the full analysis here. Would be very interesting to hear others’ thoughts on the ETH vs ERC-20 correlation - santiment.net/blog/eth-vs-er…

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