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What Is Bitcoin Dominance?

Author

Rickie Sanchez

Tags

Tags Editor's Choice / Slider Posts

Reading time

5 mins
Last update

Author

Rickie Sanchez

Tags

Editor's Choice / Slider Posts

Reading time

5 mins
Last update

Author

Rickie Sanchez

Tags

Editor's Choice, Slider Posts

Reading time

5 mins
Last update

Bitcoin Dominance

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Key Takeaways

  • Bitcoin Dominance is a metric that shows Bitcoin’s market cap relative to the entire crypto market capitalization.
  • A high dominance indicates Bitcoin is a major player in the crypto market. A low dominance suggests altcoins are taking up a bigger share.
  • It helps understand market trends and investor sentiment. For example, a rising dominance might signal investors’ moving towards safer assets like Bitcoin.

In the crypto markets, one metric that stands out as one of the key indicators traders and investors look at is Bitcoin’s Dominance. But what exactly is Bitcoin Dominance, and why is it significant? Can it genuinely provide insights into the performance of altcoins? There are also arguments against its accuracy in reflecting the crypto market.

In this article, let us explore Bitcoin’s Dominance in detail, its history, how it affects the entire crypto market, and how traders can utilize it to navigate market cycles.

What Is Bitcoin Dominance?

Bitcoin dominance is a measure of the significance of Bitcoin within the cryptocurrency market. It is expressed as the ratio of Bitcoin’s market capitalization to the total market capitalization of all cryptocurrencies combined.

To simplify this concept, let’s use a hypothetical example. Imagine the entire cryptocurrency market is valued at $100 billion. If Bitcoin’s market capitalization accounts for $60 billion of that total, then Bitcoin’s dominance is at 60%.

Based on CoinMarketCap data at the time of writing, Bitcoin’s dominance hovers between 54% and 56%. In other words, Bitcoin’s market capitalization surpasses more than half of the cryptocurrency market, valued at approximately $1.4 trillion.

History Of Bitcoin Dominance

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For many years, Bitcoin was the dominant cryptocurrency, with its market share close to 100%. This was during a time when few cryptocurrencies existed, and Ethereum had not yet materialized. Stablecoins like Tether (USDT) were also not part of the crypto landscape. However, things began to change in 2017 when the era of altcoins emerged.

In February 2017, Bitcoin’s market share was a strong 85.4%. But within a mere four months, its market share dropped significantly. The popularity of initial coin offerings (ICOs) fueled the rise of alternative cryptocurrencies, causing Bitcoin’s dominance to drop to 40% by June of that year. ERC-20 tokens also gained traction during this period, and there was even talk among Ethereum enthusiasts of the “flippening,” where Ethereum’s market cap would surpass Bitcoin.

By January 2018, Bitcoin’s dominance had fallen to an all-time low of 32.8% as the bear market set in. Unfortunately, the altcoin season ended, leaving many first-time investors with substantial losses as many ICO projects failed to deliver.

After the bursting of the bullish bubble, Bitcoin’s dominance saw some recovery, reaching highs of 70% in September 2019. However, it is unlikely that Bitcoin will surpass this level in the future.

Today, the crypto asset landscape is vastly different from the early 2010s. Bitcoin has undergone hard forks like Bitcoin Cash (BCH), and new trends such as DeFi have shifted liquidity towards Ethereum. The ICO hype that once drove the market has also faded out.

How Does Bitcoin Dominance Affect The Entire Market?

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The Bitcoin Dominance Index (BTC.D) is a valuable tool for traders seeking insights into cryptocurrency, particularly to gauge trader sentiment. Asset prices are fundamentally influenced by the dynamics of supply and demand, and this index effectively measures the demand for Bitcoin compared to the demand for altcoins.

Bitcoin’s dominance is often influenced by periods known as “altcoin seasons.” During these times, altcoins gain market share relative to Bitcoin, thereby reducing Bitcoin’s dominance.

It is important to note that Bitcoin dominance is not always directly impacted by bull or bear markets because it is a ratio, not an absolute figure. This means that if Bitcoin’s price decreases, but the rest of the cryptocurrency market also experiences a similar decline, Bitcoin dominance will likely remain relatively stable.

The crucial aspect of Bitcoin dominance is its role in helping traders understand whether altcoins are in an uptrend or downtrend against Bitcoin. When Bitcoin dominance increases, it generally indicates that altcoins, as a group, are losing value relative to Bitcoin. 

Conversely, when Bitcoin dominance decreases, altcoins, as a group, tend to gain value relative to Bitcoin. As a result, in most cases, traders may consider allocating their investments to Bitcoin when Bitcoin dominance is in an uptrend and shifting towards altcoins when it is in a downtrend.

Using Bitcoin Dominance To Navigate Market Cycles

It is important to understand that these outcomes should not be viewed as rigid predictions but rather as guidelines. A more practical approach is to consider Bitcoin’s Dominance in terms of where liquidity is moving and the associated risks. For example, tracking whether capital enters Bitcoin and altcoin can provide valuable insights when trading decisions.

When capital flows into Bitcoin while exiting altcoins or the market altogether, assessing the risk associated with holding altcoins can be tricky. During bear markets, most altcoins depreciate relative to the dollar and experience a prolonged downturn compared to Bitcoin (i.e., ALTS/BTC).

Cons Of Bitcoin Dominance

Although the Bitcoin dominance metric is widely used, it has faced criticism due to certain limitations in its reliability.

One of the primary criticisms is its failure to consider permanently lost Bitcoins. This means that Bitcoin’s ‘real’ market capitalization is likely lower than indicated because a portion of its supply is effectively inaccessible. This factor can distort the actual picture of Bitcoin’s dominance in the market.

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Another important factor not accounted for in the metric is the growing dominance of stablecoins. Between 2019 and early 2022, the market capitalization of stablecoins has experienced rapid growth, soaring from around $4 billion to $151 billion.

This growth in stablecoin usage provides traders and investors an alternative to Bitcoin, particularly when seeking stability or entering or exiting the crypto market to secure profits. As a result, this dilution of Bitcoin’s share in the market impacts the accuracy of the Bitcoin Dominance metric.

Final Thoughts

While Bitcoin’s dominance is an intriguing statistic to keep on your radar, it is important to recognize its limitations in reflecting Bitcoin’s actual value. Additionally, it is worth noting that market capitalization does not directly represent the influx of money into a cryptocurrency; it is only a measurement based on the circulating supply and the current market price.

Today, with the proliferation of numerous cryptocurrencies in the space, Bitcoin’s dominance has decreased significantly. However, this change is not inherently good or bad; it is simply a tool providing a broader perspective on how the crypto landscape is evolving. It helps us understand Bitcoin’s relative importance in relation to other cryptocurrencies in the market, which can be valuable for investors and analysts in making informed decisions.