5min read
Published on: Aug 20, 2024
#Crypto 360
Bitcoin dominance is a metric that explains the degree to which Bitcoin holds the dominant position in the entire crypto market in terms of market cap.
Bitcoin (BTC) is the world’s first cryptocurrency to debut in the world that has since dominated the market.
It means that the market capitalisation of Bitcoin is the highest as compared to that of other cryptocurrencies.
The phenomenon is known as Bitcoin dominance in the crypto world.
As per CoinStats, Bitcoin dominance hit 54.5% on 10 August, the highest level since April 2021. Even during its worst days, the dominance of Bitcoin has always remained above 30%.
The metric is used by traders and analysts to study current market trends and predict future trends. An experienced trader uses the metric to their advantage to strategically trade and realise maximum profits.
In this blog, we will learn about Bitcoin dominance in detail.
Simply explained, Bitcoin dominance is a metric that explains the degree to which Bitcoin holds the dominant position in the entire crypto market in terms of market cap.
Image: Bitcoin outweighs other cryptocurrencies
It is measured as the ratio of Bitcoin’s market cap to the market cap of the entire crypto market.
Bitcoin Dominance = Market Cap of Bitcoin
Market Cap of All Cryptocurrencies
Let's calculate the current Bitcoin dominance.
At press time,
The metric highlights Bitcoin’s dominant share in the overall crypto market.
The ebbs and flows of Bitcoin dominance over time point to the complexity of evolving dynamics in the crypto market.
Launched in 2009, Bitcoin was the first cryptocurrency in the world. For years, Bitcoin dominance was as high as 95%.
Source: Bitcoin Dominance Chart
2015 saw the launch of Ethereum (ETH) which later emerged as the second largest cryptocurrency. However, it challenged the dominance of Bitcoin though negligibly. But its success and resilience in the face of Bitcoin dominance and other challenges encouraged other cryptocurrencies to debut in the market.
2017 saw a boom of initial coin offerings (ICOs) as many altcoins such as Cardano (ADA) debuted in the crypto market. Due to the ICO boom, Bitcoin dominance plummeted from over 85% (January 2017) to only slightly above 30% (January 2018). During this phase, Bitcoin’s price also declined.
The crypto market meanwhile crashed in 2018, and the ensuing bear market continued well into the whole year.
However, Bitcoin dominance began recovering during the second half of 2018 and reached 50%. As ETH’s value slipped 85% in 2019, Bitcoin dominance soared to 70%.
2019-20 saw a correction in the crypto market. Bitcoin dominance was trending in the range of 60%-70% ahead of the third halving in May 2020.
Related: Bitcoin Halving Explained
As the year 2021 progressed, Bitcoin dominance sunk from over 70% (January) to below 40% (December). The drop can be attributed to an excitement around new crypto projects such as decentralised finance (DeFi) projects, non-fungible tokens (NFTs), and a growing retail interest in altcoins.
Since then, Bitcoin dominance hasn't even reached 60%.
Image: Bitcoin dominance over time
As the figure hit over 55% this week, the entire market wants to know if Bitcoin dominance will rebound over time to its past glory.
There are a few key factors that affect Bitcoin dominance, and we must learn about them to understand the phenomenon.
Bitcoin dominance is mostly dependent on the changing market dynamics.
It has been observed that Bitcoin dominance rises during a bear run and falls during a bull run. This is because during a bull run, traders bet on altcoins, NFTs, Metaverse projects etc. to realise high profits. In such circumstances, Bitcoin dominance suffers.
Conversely, during a bear run, traders sell other crypto assets and come back to Bitcoin. It's so because traders rely on a time-tested asset in a conservative market. Bitcoin dominance rises in such circumstances.
The proliferation of altcoins has diluted Bitcoin dominance over time.
Ethereum is a major disruptor in the crypto ecosystem as it slowly emerged as the first choice of the developer community. Developing smart contracts and decentralised applications (dApps) has never been easier with more such crypto projects debuting in the DeFi system.
Recommended Read: Decentralised Applications Explained
Even though upgrades such as SegWit and Taproot facilitated the implementation of complex smart contracts on the Bitcoin network, it just didn’t pick up due to scalability challenges.
However, we see a shift towards a stronger Bitcoin dominance whenever the market is turbulent as most traders prefer to trust Bitcoin as the most reliable cryptocurrency.
Even if most traders invest in Bitcoin during a bear market, they are aware that all cryptocurrencies, including Bitcoin, are volatile and high-risk.
Simultaneously, there are those traders who want to play it safe and invest in low-risk assets in the crypto market. Stablecoins are just the kind of cryptocurrencies for the latter kind of traders.
A stablecoin is a cryptocurrency the value of which is pegged to a stable asset like the U.S. Dollar, thereby maintaining a stable value.
Stablecoins are low risk, less volatile and safer than Bitcoin or any other cryptocurrency.
The combined market cap of all the stablecoins stood at $170 billion at time of writing.
Among the more conservative traders, stablecoins are preferred over Bitcoin in a bear run. The preference for stablecoins among traders also contributes to a lower Bitcoin dominance.
Traders use Bitcoin dominance as a metric to analyse the state of the crypto market and execute their trades strategically.
Bitcoin dominance can indeed be used to understand a few key market trends:
Traders use Bitcoin dominance to decide if it’s the right time to diversify their crypto portfolio.
If Bitcoin dominance is low, it means it’s a good time to put your eggs in different baskets. In short, it’s a good time to diversify your portfolio and invest in altcoins, stablecoins etc. Such a phase is also referred to as “alt season.” Note that it’s a bull market when Bitcoin dominance goes down.
Image: Bitcoin dominance and Alt season
If Bitcoin dominance is high, it’s a bear market when nearly the entire crypto market collapses. In such circumstances, it’s best to rely mostly on Bitcoin and exit your positions in altcoins.
Traders also use Bitcoin dominance to capture the composition of the crypto market.
When Bitcoin dominance is high, the market share of Bitcoin is a lot as compared to that of other cryptocurrencies.
Bitcoin dominance used to be as high as 90% in its early years, i.e. 2009-2015, as there were nearly no altcoins back then.
With the emergence of Ethereum and other altcoins beginning 2015, the figure has been floating within the range of 40%-50%.
The lowering of Bitcoin dominance over time indicates how the market cap of Bitcoin is falling as altcoins occupy a much higher share in the crypto market now.
Let's discuss four possible scenarios to understand how traders can use Bitcoin dominance to analyse market trends and trade accordingly:
Bitcoin dominance is a market indicator and much more than that. But it is not without its disadvantages.
Below mentioned are both the pros and cons of Bitcoin dominance:
Pros | Cons |
Bitcoin dominance provides the much-needed liquidity to the crypto market as the king coin is the most liquid among all cryptocurrencies. Except the leading ones, a lot of altcoins are extremely illiquid. | Bitcoin dominance is no guarantee of profits for the traders. The metric is only an indicator that can be used in tandem with other indicators to realise gains. |
Bitcoin dominance naturally acts as a branding exercise for the king coin as it easily earns the trust of traders in a market that is looked upon with doubt. | Bitcoin dominance is no good news for blockchain developers as Bitcoin mostly focuses on offering an alternative financial system. |
Bitcoin dominance is a crucial metric to study the evolution of the overall crypto market as to how much share Bitcoin occupies in the crypto market as compared to different altcoins.
Bitcoin dominance is an indicator of the king coin’s huge influence on the global crypto market and how the price movement of BTC sways the flow of the entire crypto market.
In fact, Bitcoin is so popular that it has become almost synonymous with crypto, and all the other cryptocurrencies are referred to as altcoins (cryptocurrencies other than BTC).
Even today, when Bitcoin dominance has come down to nearly 50%, the market cap of Bitcoin remains higher than the combined market cap of other cryptocurrencies.
As described above, the metric is used by experienced traders to analyse trends and execute trades strategically to their advantage.
Q. What is Bitcoin Dominance?
A. Bitcoin dominance is an indicator used in the crypto market to explain the degree to which Bitcoin holds the dominant position in the overall crypto market in terms of market cap.
Q. How is Bitcoin dominance measured?
A. Bitcoin dominance is measuring by dividing Bitcoin's market cap by the combined market cap of all cryptocurrencies.
Bitcoin Dominance = Market Cap of Bitcoin
Market Cap of All Cryptocurrencies
Suppose the market cap of Bitcoin is $1.5 trillion and that of all the cryptocurrencies is $3 trillion, then Bitcoin dominance is ($1.5 tn/$3 tn=) 50%.
Q. What factors affect Bitcoin Dominance?
A. They key factors affecting Bitcoin dominance are:
Q. How is Bitcoin dominance important for traders?
A. Traders use Bitcoin dominance as an indicator to analyse whether there is a requirement of asset diversification or not in the face of changing market dynamics.
Q. What is the important of Bitcoin dominance?
A. Bitcoin dominance is an indicator of the king coin's huge influence on the global crypto market and how BTC's price movement sways the flow of nearly the entire crypto market. The metric is used by experienced traders to analyse market trends and execute trades strategically for their advantage.
This article is for informational purposes only and not intended as investment or financial advice. It contains opinions and speculations that are subject to change without notice.
The author and publisher disclaim any liability for decisions made based on the content of this article. Readers are advised to conduct their own research and consult a financial advisor before making investment decisions.
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