What Is Bitcoin Dominance?

Key Takeaways:

• Bitcoin dominance is the ratio of Bitcoin’s market cap to the overall market cap of cryptocurrencies.

• It serves as a metric used by crypto traders in trying to get a pulse of the market, spot possible trends and trading opportunities, and understand trends in the altcoins market.

• Bitcoin’s fluctuating dominance over time can help traders decide how to position themselves in the market.

• It is worth noting that Bitcoin’s dominance of the market cap does not reflect its real value, nor does it mean a sudden influx of money to the market.

• The increase or decrease of Bitcoin dominance is not necessarily a good or bad thing; it serves strictly as a tool that may give market participants a better perspective of how the crypto space is evolving.

Introduction

In simple terms, Bitcoin dominance is the ratio of Bitcoin’s market cap to the global market cap of cryptocurrencies. But for those new to the crypto space, what exactly does this mean, and how is it used? Below we outline the ins and outs of this important metric.

What Is Bitcoin Dominance? 

In more detail, Bitcoin dominance is a percentage value that is calculated based on Bitcoin’s current market capitalisation divided by the global crypto market cap. For example, at the time of writing, Bitcoin’s market cap is US$539 billion, while the global crypto market cap is US$1.16 trillion. Dividing $539 billion by $1.16 trillion equals 46% — this is the share of the crypto market cap that’s in Bitcoin.

Bitcoin’s market cap is calculated by multiplying the number of bitcoins in circulation by its current market price per coin. To date, there are approximately 19.3 million bitcoins in existence (with a maximum supply of 21 million), trading at the price of US$27,800 — the market cap at the time of writing is therefore ~US$539 billion. 

How Crypto Traders Use Bitcoin Dominance

This ratio is derived from Bitcoin’s relationship with the rest of the crypto market. It serves as a metric that may be used by crypto traders to get a pulse of the market, manage risks, and help spot possible trends and trading opportunities, typically in conjunction with other data sets.

Looking at historical data, a significant portion of the crypto market has generally followed the shape and direction that Bitcoin takes (see diagram below). Since Bitcoin dominates the majority of the overall crypto market cap, it has historically been highly and positively correlated with the majority of altcoins, which then heavily react to its price movement. With this correlation, some suggest that Bitcoin dominance can also help in understanding trends in the altcoin market.

When Does Bitcoin Dominance Change? 

To understand what affects the changes to Bitcoin dominance, let’s look at the two factors that make up the ratio: Bitcoin market cap and the global crypto market cap. 

• For example, because the amount of bitcoins in circulation will not significantly increase in a short time, Bitcoin’s price is deemed to have a bigger influence on its market cap compared to its number of coins in circulation. (There are only about 1.7 million bitcoins left to be mined, and the annualised inflation rate, or the rate at which prices have risen over the last 12 months, is ~1.5% at the time of writing.) Historically, as Bitcoin’s price increased over time, there was a tendency for its market dominance to also increase proportionately. But as new advancements and innovation in altcoins have come into play, this trend in Bitcoin’s dominance may not persist in the long run. 
• Bitcoin’s market cap is just one part of the equation: While there’s no exact science to it, other factors could also affect Bitcoin’s dominance, such as altcoin market activity and market conditions that could ultimately impact the total crypto market cap. 

Bitcoin dominance may be facing a steady decline as the number of altcoins grows and crypto markets diversify over time. However, depending on how the overall altcoin market performs, Bitcoin dominance can fluctuate over time. It is these intermediate changes and fluctuations that are of interest to traders because they can act as indicators regarding the current phase of the market, which may help traders to decide, when looking at a number of different metrics, how they wish to position accordingly.

Bitcoin’s Dominance Over Time

Bitcoin had roughly 99% of the crypto market cap share when it was first launched in 2009. The crypto landscape was smaller, and there were not a lot of other cryptocurrencies back then. Four years later, Bitcoin had a dominance of 94%, as there were only a handful of altcoins that competed with it in the market. Even when Ethereum entered the space in 2015, Bitcoin dominance was still at around 90%.

2017 Dominance

Things started to shift in 2017: Bitcoin dominance dropped from 96% in February 2017 to a low of 37% at the beginning of 2018. During this period, Ethereum saw early success, anchored by an initial coin offering (ICO) mania and the birth of new coins and tokens. There was an increase in enthusiasm for altcoins, and market participant speculation was high. This shift caused Bitcoin dominance to plummet. 

This ICO mania did not last long, however, as Bitcoin’s price temporarily reached a new all-time high at the end of December 2017 before crashing in the subsequent months. While Bitcoin’s price continued to slip, its dominance also remained low. The decreasing confidence and increasing negative sentiment experienced by the overall market ultimately led to the 2018 cryptocurrency crash and the ensuing bear market, which lasted about a year.

Read more about our detailed analysis of bear markets.

2019–2020 dominance

Around 2019, the crypto market eased and corrected, and Bitcoin’s price continued to recover in tandem with its dominance. Ahead of the 2020 Bitcoin halving, its dominance jumped, bouncing somewhere in the 60%–70% range. 

Although halving pushed Bitcoin dominance to a high level in May 2020, its dominance significantly dropped from ~66% to ~55% due to the DeFi summer, when many DeFi tokens appeared and gained traction.

2021 Dominance

Bitcoin’s price started rising rapidly again in 2021, where its market cap spiked to an unprecedented rate of 700% since March 2020, surpassing its previous all-time high by a significant amount. 

In this period, there was growing interest in crypto from institutional clients and celebrities. New innovations gave way to the rise of DeFi and non-fungible tokens (NFTs), and retail clients were dipping their toes in altcoins. The confidence in crypto markets increased again, but relatively decreased for Bitcoin. This resulted in Bitcoin gradually losing more of its market share to altcoins, and its dominance has remained under 40% since (at the time of writing).

Why Bitcoin Dominance Is Still Important Today

Bitcoin dominance is one of the data sources that feeds into the crypto Fear and Greed Index — a key market sentiment indicator that aims to measure whether certain markets or assets are trading above or below their purported value as a result of overall market sentiment; it looks at whether fear or greed is more dominant in the market. A rise in Bitcoin dominance usually signals fear. 

In some scenarios, the ratio can also signal the onset of an altcoin season, which refers to the period when a number of altcoins quickly increase in price against the dollar and Bitcoin simultaneously. Bitcoin dominance is one of the most relevant metrics for altcoin season, where popular altcoins gain the market’s favour, and their performance is usually better than Bitcoin’s, thus reducing Bitcoin’s share of the crypto market and dominance. 

Furthermore, there are other ways that market participants use Bitcoin dominance in making trading decisions. One is a strategy that provides buy-and-sell signals, which use Bitcoin dominance to determine the strongest trend. 

In a nutshell:   

Conclusion — How Much Weight Does Bitcoin Dominance Carry?

While Bitcoin dominance can be a useful tool for traders, it comes with its own set of disclaimers. One of them is that it is starting to show unprecedented behaviour, arguably slowly losing its role as a sentiment gauge. 

Some in the crypto space are questioning its reliability as a market indicator, given the complexity inherent within the crypto ecosystem. There are also other factors unaccounted for in the ratio, such as lost bitcoins and market liquidity, which can affect Bitcoin’s market cap and, thus, skew the metric.

The crypto space is complex and hard to predict. Traders need to look for many different signals to determine a proper trading strategy. Bitcoin dominance is only one of those signals, and solely relying on it is not ideal.

It is also worth noting that Bitcoin’s dominance of the market cap does not reflect its real value, nor does it mean a sudden influx of money to the market. Rather, it is a metric based on the circulating supply and current market price, which may indicate market sentiment. 

Additionally, with more and more altcoins entering the market, Bitcoin dominance can be expected to keep falling. As the altcoin ecosystem keeps expanding, it’s difficult to say how helpful Bitcoin dominance will be as an indicator for the wider market in the future. The increase or decrease of Bitcoin dominance is not necessarily a good or bad thing; it serves as a tool that may give traders some perspective of how the crypto space is evolving.

Due Diligence and Do Your Own Research

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Past performance is not a guarantee or predictor of future performance. The value of crypto assets can increase or decrease, and you could lose all or a substantial amount of your purchase price. When assessing a crypto asset, it’s essential for you to do your research and due diligence to make the best possible judgement, as any purchases shall be your sole responsibility.