Flight to Quality in Crypto Explained

You may have heard the term ‘flight to quality’ many times in the financial press. The term refers to the situation when investors shift their funds to the highest-quality instruments within an asset class or choose a ‘safer’ asset class.

Flight to quality occurs when investors believe in the solid long-term prospects of specific assets. When investors are outright scared, they move to cash.

Right now, we can witness the flight to quality in crypto markets. BTC dominance, which measures Bitcoin’s market share as a percentage of total crypto market capitalization, has recently moved above the 56% level.

At the start of this year, BTC dominance hovered near the 50% level, so the world’s main cryptocurrency has significantly increased its market share in the first eight months of 2024.

BTC’s market share gains have triggered market share losses for other asset classes in the crypto space. For example, the BitMEX Meme Basket Index (BMEMET) has settled well below the levels seen at the start of this year. The BMEMET pullback from March 2024 highs looks especially brutal, as the index has lost more than 80% amid declining interest for meme coins.

The dynamics of the memecoin index show that the popularity of this asset class has fallen sharply. Meanwhile, the general correction in crypto markets has been rather modest by crypto standards. These developments show that crypto investors have been selling the most speculative assets (meme coins) while keeping their exposure to the highest-quality assets like BTC and ETH.

So, what should investors do when the flight to quality begins? The rule of thumb is that you should not fight the tide. When the market starts selling speculative assets, the selling pressure could be extremely strong, and such assets would suffer from serious pullbacks.

The flight-to-quality scenario is a perfect time to build positions in high-quality assets. As flight to quality occurs at times when the market is not bullish, the prices of the highest-quality assets would be rather moderate, providing investors with an opportunity to increase their positions at attractive levels.

At the same time, investors should stay away from coins with weak fundamentals, as such coins are usually owned by speculative traders who would quickly sell them if they do not enjoy immediate upside.

In this light, it is not surprising to see that BTC's dominance continues to grow month after month. The market votes for the world’s key decentralized cryptocurrency, whose long-term prospects are beyond any doubt.

Is it possible for a new bull market to begin without a corresponding rally in speculative assets? Sure!

Typically, the highest-quality assets are the first to start the bull run. When speculative traders see that prices of the main coins are rising, they start searching for opportunities in lower-quality coins.

That said, individual coins that generate buzz can rally even if general market sentiment shows a high preference for high-quality assets. However, finding such coins could be a complex task, so regular investors who do not have the time to do thorough market research would be better off sticking to top names in the crypto space.