Bitcoin’s dominance over time
Exactly how much of the total crypto market is currently represented by Bitcoin is shown in the graph below. As we can see, Bitcoin makes up about 42.5% of the global crypto market’s $2.11 trillion market cap. Historically, this is just a few percentage points shy of its all-time low of 32.8% reached in January 2018. We will have more to say on this later.
Figure 1: Total market Capitalization Dominance, %% | Source: http://www.tradingview.com/markets/cryptocurrencies/global-charts/
While Bitcoin’s dominance is fluctuating, looking at the trendline we can assess that the overall dominance has been in decline ever since. Back in 2013, Bitcoin had a market dominance of around 94% because almost no alternative coins, also referred to as altcoins, existed. This dramatically changed in 2017, when Ethereum’s gradual price increase kicked off the so-called ICO boom that led to the rise of thousands of crypto coins and tokens. In March of 2017, Bitcoin’s dominance stood around 85% before it plunged to as low as 38% in just less than fourth months.
After an intermittent increase to over 62% by mid-December, Bitcoin’s dominance fell through the roof to its all-time low of 32.8%, thereby ushering in the crypto bear market of 2018. During this bear market that lasted more than two years, Bitcoin’s dominance started to recover, hitting a temporary top at the beginning of January 2021 of just over 71%.
Since the beginning of this year, we have again seen a sharp decrease in Bitcoin’s dominance. Back in May, it reached a temporary low of under 40%, then the Bitcoin dominance increased to around 48% by the end of August, before another decline set in again to around 40% end of October.
The relevance of Bitcoin’s dominance for investors
As already said, structurally, Bitcoin’s dominance has been in a steady decline since the birth of altcoins. Over the years, the crypto-asset ecosystem has proliferated with many different projects capturing some of its total market capitalizations. With Ethereum, a second crypto network has established itself alongside Bitcoin. With a dominance of almost 20%, Ethereum’s coin Ether has captured almost 1/5th of the total market capitalization in the crypto space. Another domain are stablecoins, whose dominance is around 6% of crypto’s total market cap.
So, while – from a macro perspective – Bitcoin’s dominance is bound to be in continuous decline given the crypto markets will grow more diversified, it is the intermediate fluctuations that should be of interest to a crypto investor. After all, the ebbs and flows of Bitcoin’s dominance can tell us a lot about the market, its current phase, and how investors need to position themselves respectively.
It’s a matter of fact that crypto markets are still highly correlated to Bitcoin. When the mother of all cryptocurrencies moves in either direction, altcoins – which again stands for alternative coins and tokens besides Bitcoin – can be affected heavily, positively or negatively.
Because altcoins still heavily react to Bitcoin’s price movements and its changing dominance, Bitcoin’s dominance ratio can be used as a tool to gauge the crypto market’s current sentiment. Most of the time, altcoins trade either in a down- or an uptrend against Bitcoin. It’s only when Bitcoin’s dominance increases while Bitcoin’s price is stable or when Bitcoin’s dominance decreases, and its price also decreases that the prices of altcoins remain rather stable.
When Bitcoin’s dominance increases, altcoins usually lose market share and therefore value vis-à-vis Bitcoin. Such a scenario is often encountered after Bitcoin has gone through a consolidation phase and is entering the early stages of a bull phase. As the past has shown so far, it is usually Bitcoin that sets off to a rally first, with altcoins following soon after.
Bitcoin’s dominance also increases sharply when Bitcoin’s price is taking a hit and altcoins are sold even harder. When this happens, an investor should not be holding Bitcoin and most certainly have no exposure to altcoins but should be in stablecoins instead. Obviously, timing the market is easier said than done. Nevertheless, looking at the Bitcoin dominance can be one tool to help with the timing. Usually, such a market situation happens after Bitcoin has seen a fast run-up or has potentially even hit its local blow-off market top.