Bitcoin Dominance Explained

To this day, there is still a lot of tribal infighting within crypto markets. While so-called Bitcoin maximalists are only focused on Bitcoin as the coin to rule all other coins long-term, other investors broadly diversify over a set of crypto assets as they believe the future will consist of a multi-blockchain world.

As of now, over 12,000 crypto-assets exist according to Coinmarketcap. With more coming online almost every day, Bitcoin seems nowhere near to making everything else obsolete. But while there are plenty of alternatives to Bitcoin, the mother of all cryptocurrencies still makes up a significant amount of the overall market capitalization.

When looking at Bitcoin’s market share, crypto traders usually refer to a popular expression called Bitcoin Dominance. This expression captures Bitcoin’s market capitalization in comparison to the crypto market’s total market capitalization. So, if the total market cap of all cryptocurrencies were to stand at $1 trillion and Bitcoin’s market capitalization is $600 billion, Bitcoin’s dominance would be at 60%. It is this simple metric – used by various traders and Ficas alike – that helps gauge Bitcoin’s current weight on crypto markets.

Guest contribution by Daniel Jungen and Pascal Hügli

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.

The lure of altcoin season

It’s usually when Bitcoin dominance decreases, while at the same time Bitcoin’s price increases or at least stays stable that things start moving fast in the crypto markets. The more bitcoin is showing strength and its price increases, indicating a proper bull phase, the higher chances are that altcoin season is about to begin. While there is no clear-cut definition, the beginning of an altcoin season can be seen to coincide with the fact that at least 75% of the top 50 altcoins have performed better than Bitcoin over the last 90 days.

An altcoin rally has historically always followed Bitcoin’s initial price pump, setting off a bull cycle. After Bitcoin’s price increase, the top contenders among the many different altcoins have started to outperform as well. With Bitcoin’s dominance decreasing further, more and more altcoins start to outperform Bitcoin until almost 100% of all crypto assets – including the so-called shitcoins – increase in value in Bitcoin terms. At this point in time, Bitcoin’s dominance usually nears its all-time low, indicating that the temporary overall market top might be near, and profits should be taken off the table.

As an investor, keeping a close eye on Bitcoin’s dominance ratio is a must as it is a helpful indicator to properly assess the current market sentiment. A simple rule of thumb says that during a Bitcoin season, the time when Bitcoin’s dominance is on a constant uptick, an investor should be in Bitcoin. Once an altcoin season commences, investors should move some of their assets into altcoins on time to profit from Bitcoin’s temporary decrease in dominance and altcoin’s rise in value A historical index keeping track of Bitcoin as well as altcoin seasons. Below the bottom line, the markets have entered a potential Bitcoin season. Above the top line, the markets have entered a potential altcoin season.

Source: https://www.blockchaincenter.net/altcoin-season-index/

Bitcoin dominance: What to make of it?

Historically, taking heed of Bitcoin’s dominance has paid out rather well. This time around, Bitcoin’s dominance is once again sitting at the critical support level of 42%. Because October, November, and December have in the past been rather positive months for the crypto markets, some expect Bitcoin’s dominance to further decrease through the next weeks. This should obviously boost the prices of altcoins, provided that Bitcoin’s price is not falling off of a cliff itself. Once Bitcoin’s dominance is near its historical all-time low of 32,8%, investors are advised to trade cautiously and potentially take profits.

The question is: Will Bitcoin’s dominance ratio remain a good market indicator to gauge the market’s overall sentiment? Or will its predictive power wane as different crypto assets become more established and potentially decouple in correlation from Bitcoin? After all, it might be the case that Bitcoin does not compete with crypto assets like Tether (stablecoins) or Ethereum (smart contract platforms) and people might gradually grasp this.

Some would argue that the Bitcoin dominance metric is fundamentally broken as it compares apples to oranges since current dominance charts usually compare the market cap of Bitcoin with all other sorts of crypto assets that are not really comparable to Bitcoin. The more crypto markets mature, the more bulk charts like that of Bitcoin’s dominance will have to be broken down further into different categories as shown here. For Bitcoin, A historical index keeping track of Bitcoin as well as altcoin seasons. Below the bottom line the markets have entered a potential Bitcoin season. Above the top line, the markets have entered a potential altcoin season. Source: https://www.blockchaincenter.net/altcoin-season-index/ Bitcoin versus altcoin movements: this means that it needs to be compared to other proof of work coins attempting to be money. Among them are Litecoin, Bitcoin Cash, Dash, and more. When this index – also referred to as the real Bitcoin dominance index – is taken into account, Bitcoin’s dominance ratio is actually at over 93%.

Interestingly enough, some researchers second the statement that Bitcoin’s real dominance is actually a lot higher than the usual Bitcoin dominance chart suggests. They state that the dominance index does not factor in market liquidity, which is generally lower for large amounts of altcoins to be sold. So, selling one altcoin for $10 is no problem but selling millions of dollars of this coin for this price can be difficult. Because standard dominance charts merely consider market capitalization and leave out market liquidity, they are inherently meaningless, so these researchers argue.

When looking at dominance charts this way, it becomes clear that they are not beyond all doubt. That being said, investors can still derive valuable information from fluctuations in Bitcoin’s dominance. But, as the crypto markets mature, such simple metrics have to regularly be reassessed to ensure that their informational value and ability to indicate future market movements are still trustworthy.

Bitcoin versus altcoin movements:

Source: https://www.youtube.com/watch?v=kcc1qoX4qGw

Disclaimer

The opinions expressed above are those of the authors. They do not purport to reflect the opinions or views of FICAS AG and/or Bitcoin Capital AG or its members. The designations employed in this publication and the presentation of material therein do not imply the expression of any opinion whatsoever on the part of FICAS AG and/or Bitcoin Capital AG.