Bitcoin dominance is one of the most commonly used tools in the cryptocurrency markets. By tracking the evolution of Bitcoin dominance, investors can monitor Bitcoin's relative position compared to other cryptocurrencies. Changes in Bitcoin dominance have typically provided insights into shifts in market cycles. This text explains what Bitcoin dominance practically means and what conclusions can be drawn from its fluctuations.
Bitcoin and Bitcoin Dominance
Bitcoin, launched in 2009, is the world's first and most well-known cryptocurrency that utilizes blockchain technology. Over the years, Bitcoin has been accompanied by thousands of other cryptocurrencies, each aiming to provide solutions for various purposes. Despite the emergence of numerous new cryptocurrencies, Bitcoin has managed to maintain its position as the largest cryptocurrency by market value.
Bitcoin dominance is a key metric in the cryptocurrency markets, indicating the proportion of Bitcoin's market value compared to the total cryptocurrency market. Bitcoin dominance is essential as it helps investors understand how Bitcoin's relative position changes in relation to other cryptocurrencies.
Cryptocurrency Market Value and Bitcoin Dominance
Market value refers to the total value of a specific asset in circulation. In the case of Bitcoin, market value is calculated by multiplying the price of Bitcoin by the total number of mined Bitcoins.
Bitcoin dominance, on the other hand, can be calculated using the following formula:
Bitcoin Dominance = Bitcoin Market Value / Total Cryptocurrency Market Value
A higher percentage indicates a greater share of Bitcoin's market value compared to other cryptocurrencies. Conversely, a low Bitcoin dominance suggests that investors are favoring other cryptocurrencies over Bitcoin.
As of the time of writing, Bitcoin dominance is around 48%. Over the past year, Bitcoin dominance has fluctuated between approximately 40% to 50%. Before 2017, Bitcoin dominance was typically around 90%. It has steadily decreased over the years as the popularity of other cryptocurrencies relative to Bitcoin has grown.
Factors Affecting Bitcoin Dominance
The changes in Bitcoin dominance are often tied to specific influential factors, which are elaborated upon below.
Changing Trends
The number of different cryptocurrencies on the market has exploded in the last five years. Before the growth of the altcoin market, it was not uncommon for Bitcoin dominance to be over 90%. However, with the introduction of new currencies, Bitcoin's overall market share has naturally declined. The rise of altcoins has accelerated the development of the crypto market and created new demand. Factors such as the DeFi sector, NFTs, games built on blockchain, and stablecoins that maintain their value have all contributed to the reduction of Bitcoin's market share.
Market Cycle
One of the most influential factors on Bitcoin dominance is the prevailing market cycle. In a bullish market, at some point in the market cycle, Bitcoin's dominance in relation to other cryptocurrencies tends to decrease. This is because rising prices encourage investors to take higher risks and seek returns from riskier cryptocurrencies. Conversely, during a bear market, wealth typically shifts from riskier, lower market cap cryptocurrencies to Bitcoin. Despite the exponential growth in the number of cryptocurrencies, Bitcoin remains a more stable and secure investment within the crypto market.
Growth of Stablecoin Market Value
The growth of stablecoin market value is one of the most significant factors influencing Bitcoin dominance. A stablecoin is a cryptocurrency designed to maintain a stable value in all circumstances. This usually means that the value of one stablecoin is meant to closely align with one US dollar.
The share of stablecoins in the cryptocurrency market has significantly increased in recent years. Many investors now use stablecoins similarly to traditional fiat currencies in the crypto market. By utilizing stablecoins, investors can earn interest from various DeFi services without the risk of significant price fluctuations. Additionally, many cryptocurrency exchanges do not offer trading pairs with euros or dollars, making stablecoin purchases the only way to shield assets from market volatility. As the demand for stablecoins grows, so does their circulating supply. Currently, two stablecoins are among the ten largest cryptocurrencies by market value. As the popularity and market value of stablecoins increase, Bitcoin's market share naturally decreases, along with Bitcoin dominance.
Introduction of New Cryptocurrencies
New cryptocurrencies regularly enter the market and quickly gain popularity among investors. This naturally affects the current Bitcoin dominance. However, it's important to note that this kind of popularity is often seasonal, and its impact on Bitcoin dominance in the long term is typically modest. Additionally, the growth of an individual new cryptocurrency does not significantly affect the overall market structure. Thus, the effect of such a situation on Bitcoin dominance is usually minor. However, we cannot rule out the possibility of a cryptocurrency gaining massive popularity in the market, causing a significant shift in Bitcoin's relative market share.
Bitcoin Dominance and Altseason
The term "altseason" refers to a situation in the cryptocurrency world where the prices of cryptocurrencies smaller in market value than Bitcoin begin to rise rapidly. The growth in popularity of altcoins is often seasonal and historically has occurred when Bitcoin dominance has reached exceptionally high levels. During an altseason, Bitcoin dominance may plummet as investors shift their focus to riskier, smaller market cap cryptocurrencies. However, altseasons and the subsequent declines in Bitcoin dominance have historically been short-lived. As a result, investors who manage to increase their wealth during such market conditions often eventually move their assets back to Bitcoin.
Utilizing Bitcoin Dominance in Investment Strategy
Many investors use changes in Bitcoin dominance as a tool to inform their investment decisions. While the correlation between Bitcoin dominance changes and market movements is not set in stone, historical data has allowed investors to infer the following factors from shifts in Bitcoin dominance:
- An increase in Bitcoin dominance may reflect a significant price increase in Bitcoin.
- A combination of Bitcoin price increases and a decrease in Bitcoin dominance may indicate the start of an altseason.
- A decrease in Bitcoin price combined with an increase in Bitcoin dominance can signal a downturn for altcoins.
- A decrease in both Bitcoin price and Bitcoin dominance might indicate a broader market decline, with investors shifting funds to stablecoins.
Summary
Bitcoin dominance refers to the proportion of Bitcoin's market value in relation to the entire cryptocurrency market. Bitcoin dominance provides a measure of Bitcoin's relative position among the other cryptocurrencies in the market. High Bitcoin dominance indicates Bitcoin's dominant position in the market, while lower Bitcoin dominance indicates the growing popularity of other cryptocurrencies relative to Bitcoin. Bitcoin dominance is one of the most widely used tools to detect changes in market cycles.
Mikko Soon Head of Private Banking Last updated: 24.08.2023 13:00
