As the world's first cryptocurrency, Bitcoin continues to enjoy the highest level of credibility. Given its immense market capitalization, which exceeds that of the largest altcoins combined, it is not an exaggeration to claim that Bitcoin moves the whole crypto market.
Bitcoin dominance is a commonly used term when discussing the market capitalizations of Bitcoin and other cryptocurrency coins. But what is this metric, and how can you use it?
What is Bitcoin dominance?
Bitcoin dominance is the ratio of Bitcoin's market capitalization to the overall market capitalization of the cryptocurrency market. It provides a picture of Bitcoin's value in comparison to other cryptocurrencies and is commonly used by seasoned investors and traders to make better decisions.
Historically, the whole crypto market cap has followed Bitcoin's market capitalization. While Bitcoin frequently dictates the rest of the market, BTC dominance is a vital indicator for always measuring its impact.
How to calculate Bitcoin dominance
To calculate the Bitcoin dominance index, just divide Bitcoin's market capitalization by the total market capitalization of all other cryptocurrencies.
Bitcoin dominance = Market cap of BTC / Market cap of all other cryptocurrencies
For example, if the Bitcoin market cap is $1.2 trillion and the whole cryptocurrency market cap is $2.21 trillion. In this example, using the formula (1.2 trillion / 2.21 trillion), Bitcoin has a 54% dominance.
History of Bitcoin dominance
In 2017, the ICO boom and the introduction of multiple altcoins prompted investors to use BTC dominance to evaluate whether other currencies were enjoying an upswing or a decline compared to Bitcoin's price.
While the index began to be used in trading circles in 2017, it did not gain popularity until the cryptocurrency bubble of 2021. Until 2017, Bitcoin accounted for up to 95% of the global crypto market capitalization due to a lack of substantial competition from other cryptocurrencies.
BTC's dominance fell to an all-time low of 37.6% in early 2018 due to the ICO rush and the growing popularity of other blockchains like Solana. When Ethereum experienced an 87% price drop in 2019, BTC dominance increased to roughly 71%. Today, in 2024, Bitcoin's dominance is just above 54%.
How is Bitcoin dominance connected to market capitalization?
Bitcoin dominance measures Bitcoin's market share primarily through its market capitalization. But how do you calculate the market capitalization itself?
Market capitalization is the overall value of the cryptocurrency, which is calculated by multiplying the total number of coins mined by the price of a single coin:
Market capitalization = Total number of coins in circulation x Price of a coin
The market capitalization of every cryptocurrency reveals how popular it is with investors. Investors use it to understand the currency's position and market share compared to other coins in the crypto market.
Cryptocurrencies, like regular stocks, can be categorized based on their market capitalizations. Large-cap cryptocurrencies have a market capitalization of approximately five billion dollars or more. Mid-cap cryptocurrencies are more volatile but may have higher growth potential. Small-cap cryptocurrencies may have great potential for short-term development, but they are often highly volatile and are seen as riskier crypto investments.
What factors influence BTC dominance?
Some factors impact market conditions and Bitcoin dominance more than others.
Changes in market trends
Over time, as cryptocurrencies have grown in popularity, BTC has lost a considerable chunk of its market share. Blockchains such as Ethereum support programmable smart contracts and can host decentralized applications (dApps).
While dApps can be implemented on the Bitcoin network, particularly following improvements such as SegWit and Taproot, bottlenecks remain because the chain was not constructed from the ground up to handle these challenges.
When Bitcoin dominance increases, it typically indicates that more individuals invest in Bitcoin than in altcoins. This suggests one of two things: Bitcoin is increasing faster than altcoins or sinking slower.
Bull markets and bear market
The rule of Bitcoin supremacy is clear: altcoins experience significant fluctuations in value. Altcoins become increasingly popular during a bull market, which may lead investors to seek higher profits by investing in altcoins, NFTs, and risky assets. This will reduce BTC's dominance. In bear markets, BTC dominance typically increases as investors turn to cryptocurrencies that have endured the test of time.
On-ramping via stablecoins
Stablecoins are a type of cryptocurrency designed to maintain a stable value by being tied to a consistent asset, such as the US dollar. Their introduction has put pressure on Bitcoin's dominance, particularly during bear markets or periods of volatility, as they are considered less volatile than many other cryptocurrencies.
Stablecoins currently have a market capitalization of around $140 billion. Tether, the largest stablecoin, has a market capitalization of approximately $120 billion, a significant increase from $4.1 billion at the beginning of 2020. USD Coin's market cap is now over $35 billion. As a result of stablecoin popularity, Bitcoin's portion of the overall crypto market valuation has been eroded and is declining.
How to use the Bitcoin dominance metric
Understanding Bitcoin's market share can be a useful tool for evaluating the health of the overall cryptocurrency market. We've highlighted a few ways to use this metric:
- Risk management considerations.
Investors can use BTC dominance to control their overall risk exposure in the cryptocurrency market. For example, if the value of BTC falls as Bitcoin dominance rises, it could indicate a possible bear market for altcoins.
In that event, investors heavily engaged in altcoins may consider selling some of their positions and switching to Bitcoin. You can use BTC's dominance as a barometer to evaluate the general market mood and decide how to diversify your cryptocurrency portfolio.
- Increase altcoin exposure
Traders may also use bitcoin dominance to determine which cryptocurrencies have the most potential. When more capital moves into altcoins, Bitcoin's market capitalization dilutes, and BTC supremacy dwindles. Keeping an eye on the market during this time period may help you identify prospective options for the coming altcoin season.
Resources for tracking Bitcoin dominance
Bitcoin's dominance in the crypto markets is constantly changing, making it challenging to keep track of market patterns. Several websites, apps, and platforms, such as CoinMarketCap and TradingView allow you to track Bitcoin dominance quickly.
Conclusion
Bitcoin dominance is a metric used to gain insights into the crypto markets, identify potential profitable opportunities, and determine the best way to diversify a crypto portfolio.
While it has many uses, it is not immune to flaws. Some argue that Bitcoin's market dominance was significant in the past due to the limited number of cryptocurrencies. They claim that Bitcoin's market influence will decrease over time.
Although not inherently positive or negative, Bitcoin dominance remains a popular metric, especially among Bitcoin proponents.