This article explores the concept of Bitcoin Dominance, detailing its definition, historical context, and its significance in the cryptocurrency market.
In the world of cryptocurrencies, one metric stands out as a key indicator for traders and investors: Bitcoin Dominance.
But what exactly is Bitcoin Dominance, and why is it significant? Can it truly provide insights into the performance of altcoins? There are also arguments against its accuracy in reflecting the crypto market.
In this article, we’ll delve into the details of Bitcoin Dominance, exploring 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 make this concept simpler to grasp, 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%.
As of the current moment, based on CoinMarketCap data at the time of writing, Bitcoin’s dominance hovers between 48% and 50%. In other words, Bitcoin’s market capitalization slightly surpasses half of the entire cryptocurrency market, which is valued at approximately $1 trillion.
Brief History of Bitcoin Dominance
For many years, Bitcoin stood as the dominant cryptocurrency, with its market share close to 100%. This was during a time when there were few cryptocurrencies in existence, 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 dominance was at a strong 85.4%. But within a mere four months, its market share plummeted 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 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 ICO projects failed.
After the bursting of the bullish bubble, Bitcoin’s dominance saw some recovery, reaching highs of 70% in September 2019. However, it’s 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, and new trends such as DeFi have shifted liquidity towards Ethereum. The ICO hype that once drove the market has faded into near non-existence.
How Does Bitcoin Dominance Affect The Entire Market?
The Bitcoin Dominance Index is a valuable tool for traders seeking insights into the cryptocurrency market, 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 dominance is often influenced by periods known as “altcoin seasons.” During these times, altcoins gain market share in relation to Bitcoin, thereby reducing Bitcoin’s dominance.
It’s important to note that Bitcoin dominance is not always directly impacted by bull or bear markets because it’s 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 is likely to 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 Bitcoin dominance is in a downtrend.
Utilizing Bitcoin Dominance To Navigate Market Cycles
It’s essential to understand that these outcomes should not be viewed as rigid predictions but rather as guidelines. A more practical approach is to consider Bitcoin dominance in terms of where liquidity is moving and the associated risks. For instance, tracking whether capital is entering Bitcoin, altcoins, or exiting the market entirely can provide valuable insights for decision-making.
When capital flows into Bitcoin while exiting altcoins or the market altogether, it’s crucial to assess the risk associated with holding altcoins. During bear markets, most altcoins not only depreciate relative to the dollar but also experience a prolonged downturn when compared to Bitcoin (i.e. ALTS/BTC).
Downsides 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 omission means that Bitcoin’s ‘real’ market capitalization is likely lower than what’s indicated because there exists a portion of its supply that is effectively inaccessible. This factor can distort the actual picture of Bitcoin’s dominance in the market.
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 exponential growth, soaring from around $4 billion to a staggering $151 billion.
This substantial growth in stablecoin usage provides traders and investors with an alternative to Bitcoin, particularly when seeking safety, stability, or when entering or exiting the cryptocurrency market to secure profits. As a result, this dilution of Bitcoin’s share in the market can significantly impact the accuracy of the Bitcoin dominance metric.
Final Thoughts
In summary, while Bitcoin dominance is an intriguing statistic to monitor, it’s important to recognize its limitations in reflecting Bitcoin’s real value, especially due to the presence of forked and pre-mined coins, which can distort the total market capitalization in unconventional ways. Additionally, it’s worth noting that market capitalization doesn’t directly represent the influx of money into a cryptocurrency. It’s 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 in dominance isn’t inherently good or bad; it’s simply a tool that provides us with a broader perspective on how the cryptocurrency landscape is evolving. It helps us understand the relative importance of Bitcoin in relation to other cryptocurrencies in the market, which can be valuable for investors and analysts in making informed decisions.
Frequently Asked Questions (FAQs)
Bitcoin Dominance is a metric that measures the significance of Bitcoin within the cryptocurrency market. It’s expressed as the ratio of Bitcoin’s market capitalization to the total market capitalization of all cryptocurrencies combined.
Bitcoin Dominance provides insights into the demand for Bitcoin compared to altcoins. When Bitcoin dominance increases, it generally means that altcoins are losing value relative to Bitcoin. When it decreases, altcoins tend to gain value relative to Bitcoin.
Traders can use Bitcoin Dominance as a guideline to understand where liquidity is moving. When capital flows into Bitcoin, it may indicate higher perceived safety, especially during bear markets where altcoins significantly underperform against Bitcoin.
No, Bitcoin Dominance is not a definitive indicator but a tool that provides a broader perspective on market dynamics. It should be used in conjunction with other factors for more comprehensive analysis.