Bitcoin is the first viable digital and decentralized cryptocurrency to come into existence and remains one of the most reputable cryptocurrencies in the world. Given its huge market capitalization, which exceeds the eight largest altcoins combined, Bitcoin exerts a massive influence on the entire crypto market.
Bitcoin dominance is the percentage of the cryptocurrency market that can be attributable to Bitcoin. So why does this matter?
This article explains what Bitcoin dominance is, how it works, and how you use it to better understand market trends.
What is BTC dominance?
Bitcoin dominance is the ratio between the market capitalization of Bitcoin to the total market cap of the entire cryptocurrency market. It gives a sense of BTC’s value relative to other cryptocurrencies, and helps investors and traders make better investment decisions.
You can arrive at the Bitcoin dominance index by simply dividing the market capitalization of Bitcoin by the market capitalization of all other cryptocurrencies:
Bitcoin dominance = Market cap of BTC / Market cap of all other cryptocurrencies
Let’s assume that the BTC market cap is $65 million and the total market cap of all other cryptocurrencies is $100 million. In this case, by using the formula, BTC’s dominance is 65%.
Some traders use a variant of Bitcoin dominance called the Real Bitcoin Dominance Index, which only takes into account coins that rely on the Proof-of-Work consensus mechanism. This is because the Real Bitcoin Dominance Index is committed to tracking the movement of coins that have the potential to be used as a decentralized means of exchange in the future.
The Real Bitcoin Dominance Index is calculated by dividing the market capitalization of Bitcoin by the market capitalization Bitcoin and other PoW cryptocurrencies:
Real Bitcoin Dominance Index = Market cap of BTC / (Market cap of BTC + Market cap of other PoW cryptocurrencies)
A point of distinction between real Bitcoin dominance and Bitcoin dominance is that real Bitcoin dominance excludes ICOs and stablecoins given their association with centralized intermediaries. At the time of writing, real Bitcoin dominance is around 66%.
History of Bitcoin dominance
With the ICO boom of 2017 and numerous altcoins emerging, investors started using Bitcoin dominance to determine if alternative currencies are experiencing an upswing or a downturn relative to BTC.
While the index started to be used in trading communities around 2017, it didn’t become popular until the altcoin boom in 2021.
CoinMarketCap and Trading View were some of the early platforms to monitor Bitcoin dominance and popularize it as a way to observe market sentiments and trends.
How is BTC dominance correlated with market capitalization?
As seen above, BTC dominance uses market capitalization as a primary factor. Market capitalization is the total value of the cryptocurrency, i.e., the total number of coins that have been mined multiplied by the price of a single coin:
Market capitalization = Total number of coins mined x Price of a single coin
The market cap of any cryptocurrency indicates how stable an asset is likely to be and how popular it is among investors. It is used by investors to get a holistic picture of the currency’s position relative to other cryptos in the market.
Generally speaking, large-cap cryptocurrencies are those with a market cap of $10 billion and are regarded as secure crypto investments. Mid-cap cryptocurrencies are more volatile but also offer more growth potential. Small-cap cryptocurrencies may have a lot of potential for short-term growth, but are frequently quite volatile and are generally seen as a very risky crypto investment.
At the time of writing the current circulating supply of Bitcoin is over 19 million and the price of a single Bitcoin is about $24,000. By multiplying the two, we arrive at Bitcoin’s market cap: $450 billion.
Historically, the direction of the overall crypto market’s market cap has followed Bitcoin’s. This is primarily due to the leading position that Bitcoin has in the market.
Bitcoin has emerged as the “gateway cryptocurrency” and is usually the first investment that traders make before acquiring other cryptocurrencies. This is due to a few reasons:
BTC has high visibility as the most popular cryptocurrency
BTC is accepted on every crypto exchange
BTC’s supply is deflationary due to its halving mechanism
Investors perceive cryptocurrencies with larger market caps to be a lower-risk investment
As market demand rises and investors move to acquire crypto, Bitcoin rises and takes the whole market with it. There has therefore always been a positive correlation between BTC and the overall crypto market’s market cap.
What factors influence BTC dominance?
While there are several factors that influence market conditions and BTC dominance, some are more significant than others.
Understanding what these factors are can give traders an edge when making investment decisions.
Bitcoin dominance reached its peak of 95% in 2017 given the lack of competition from other cryptocurrencies.
In early 2018, due to the ICO boom and the rising popularity of other blockchains like Ethereum, Terra, and Solana, BTC dominance fell to an all-time low of 37.64%. In 2019, when Ethereum suffered a price crash of 87%, BTC dominance surged back up to around 71%.
Over the years, with the growth of altcoins, BTC has lost a significant portion of its market share. This is because chains like Ethereum boast programmable smart contracts and can host decentralized applications.
While dApps can even be deployed on the Bitcoin network, especially after updates like SegWit and Taproot, there are still bottlenecks to be addressed since the chain is not built from the ground up to tackle these hurdles.
Usually, when Bitcoin dominance rises, it means that people are investing more in Bitcoin compared to altcoins. This means one of two things: either BTC is rising faster than altcoins or it’s falling slower.
Bull or bear market
The rule is quite simple: altcoins rise hard and fall harder.
In a bull market, altcoin popularity rises. This causes investors to take profits from BTC holdings bought during the previous bear run and channel them into altcoins, NFT projects, and riskier assets in the hope of seeing big returns. This tanks BTC dominance.
In bear markets, on the other hand, BTC dominance usually rises because investors seek to mitigate risk. Most investors are uncomfortable holding volatile altcoins and move to relatively less volatile assets like Bitcoin.
On-ramping via stablecoins
The rise of stablecoins, cryptocurrencies whose value is pegged to a stable asset like the US dollar, has put prolonged pressure on BTC dominance. In particular, during a bear market or periods of volatility, stablecoins are frequently utilized to protect crypto investors' cash.
Stablecoins are great for risk-averse investors who seek to park their money somewhere when market conditions are volatile. This allows crypto-native investors to stay within the crypto space without having to exit and pay huge taxes on realized profits.
Stablecoins currently have a market valuation of roughly $150 billion. Tether, the largest stablecoin, has a market valuation of about $66 billion, up from $4.1 billion at the start of 2020. The market value of the second largest stablecoin, USD Coin, is $54 billion.
As a result of the on-ramping of stablecoins, the share of the entire crypto market valuation attributed to Bitcoin has been diluted and is shrinking. With the recent fall of USTC, however, this trend could very well be reversed.
New coins and projects
At present, there are around 18,000 cryptocurrencies in circulation. NFT collections such as VeeFriends, CryptoPunks and Bored Ape Yacht Club have also emerged as alternative crypto assets, which is favorable for altcoins given that most NFTs are on these blockchains.
As new cryptocurrencies emerge and NFTs rise in popularity, BTC dominance tends to have a downward trend as investors seek to diversify their portfolios.
How to use BTC dominance
Bitcoin dominance is a metric that measures the percentage of the total cryptocurrency market capitalization that is represented by Bitcoin. It can be a useful metric for evaluating the health of the overall cryptocurrency market.
In general, when BTC dominance is high, it indicates that investors are bullish. Below are a few ways to use this metric.
Investors can use BTC dominance to help manage their overall risk exposure to the cryptocurrency market.
For example, if the value of BTC is decreasing but Bitcoin dominance is increasing, that’s an indication of a potential bear market for altcoins. In that case, investors who are heavily invested in altcoins may want to consider selling some of their positions and moving into Bitcoin.
Investors can use BTC dominance as a barometer to help them gauge the overall market sentiment and make decisions about how they should diversify their crypto portfolio.
Increase altcoin exposure
Bitcoin dominance helps traders understand which cryptocurrencies have the most potential.
When more capital flows into altcoins, Bitcoin’s market cap gets diluted and BTC dominance starts falling. Observing the market in this period helps investors identify promising projects.
For example, if the value of BTC is increasing but Bitcoin dominance is decreasing, that’s an indication of a potential bull market for altcoins. In that case, investors who are holding mostly Bitcoin may want to consider diversifying their portfolios by investing in altcoins.
Bitcoin dominance is a metric that can be used to help manage risk exposure, identify promising projects, and make decisions about how to balance one’s portfolio.
It’s a controversial metric, however. Some people believe Bitcoin dominance has been relevant in the past only because there were very few cryptocurrencies in existence. In time, they argue, Bitcoin will have less influence on the market.
Bitcoin dominance is nonetheless a popular metric, especially among Bitcoin proponents. When used properly, it can provide useful insights into trends that affect the entire cryptocurrency market.
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