Simply put, Bitcoin dominance is a ratio that shows how much of the cryptocurrency market valuation belongs to Bitcoin. This ratio doesn’t always stay the same and changes along with the market conditions.
Some traders consider Bitcoin dominance while making their trading decisions as they believe this ratio follows specific trends based on the market situation.
In this article, you will learn about Bitcoin’s dominance, its history, and how it is used in trading.
As the name may suggest, Bitcoin dominance shows how much of the crypto market capitalization belongs to Bitcoin. This is shown as a percentage and is calculated using the formula below:
Bitcoin Dominance = Bitcoin Market Capitalization ÷ Total Crypto Market Capitalization
Where
Bitcoin Market Capitalization = Circulating Supply × Bitcoin Spot Price
And Crypto market capitalization is the total value of the whole crypto market.
Let’s calculate Bitcoin dominance at the current market condition using the data from CoinMarketCap:
Bitcoin Dominance =$531,913,313,897 ÷ $1,160,000,000,000 =0.4585 =45.85%
It means that 45.85% of the crypto market belongs to Bitcoin at the moment.
The main factor that has an effect on Bitcoin dominance and can drive its value up or down is its spot market price. However, this is only if we assume that the market value of the rest of the assets stays the same and doesn’t change.
Considering this, Bitcoin dominance can partially tell us where the interest of investors and traders lies: are they dominantly interested in Bitcoin or are they willing to take on more risk with altcoins?
Altcoin is a market term that refers to any other crypto asset other than Bitcoin. During bull runs, traders’ and investors’ appetite for risk grows and they tend to get more interested in other crypto assets besides Bitcoin.
The growing demand for altcoins leads to an increasing market valuation which then decreases Bitcoin dominance, assuming that the demand for Bitcoin stays the same or increases slower than that of altcoins.
This market condition is famously known as the Alt Season, a period of time when altcoins show a better market performance than Bitcoin.
Bitcoin dominance can fall during bear markets as well. When the market is volatile and prices are not stable, market members exchange their cryptocurrencies for stablecoins, like Tether, which increases the demand for these assets, driving the price of other cryptos including Bitcoin down.
Stablecoins are a type of cryptocurrency that follow the price of a more stable asset like a fiat currency e.g. the US Dollar. Stablecoins come in different types and are designed in a way to keep their peg to the underlying asset at all times.
Check out our “What are Algorithmic Stablecoins?” article to learn more about algorithmic stablecoins which leverage algorithms to keep their value close to the base asset.
Back in 2009 when Bitcoin was first created, it was almost alone in the crypto market. Bitcoin dominance stood at over 99% at that time.
As Bitcoin grew in popularity, other altcoins such as Ethereum started to appear, gaining a part of the crypto market share and driving Bitcoin dominance lower.
As you can see in the chart below, Bitcoin dominance fell quite significantly in 2017 when the Initial Coin Offerings (ICOs) were at their peak. Bitcoin dominance dropped as low as 37.64 in 2018.
Bitcoin dominance recovered partially before the halving event in 2020, however, Bitcoin dominance started its declining trend again as the DeFi summer started. During that time, multiple DeFi protocols started offering eye-catching profits to their users which drove funds from the Bitcoin market to the DeFi sector.
This trend continued in the summer of 2021 when non-fungible tokens or NFTs became the center of attention.
Bitcoin Dominance Over Time
Over the years, some traders realized they can use Bitcoin dominance alongside other indicators in their technical analysis to find trading and investment opportunities in the market.
For example, a falling Bitcoin dominance accompanied by a steady price can indicate that an altcoin season has started.
During this time, altcoins will outperform Bitcoin and traders can use this knowledge to manage their portfolios accordingly. On the other hand, an increasing price with growing dominance can signal an imminent Bitcoin bull run.
You should always remember that you cannot rely on Bitcoin dominance alone to decide how the market will behave in the future. It is merely a metric that gives us an idea of the overall market condition and helps us see where the interest of market members lies.