The Relevancy of Bitcoin Dominance

Written by Mashell Chapeyama
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Bitcoin is the most Dominant Cryptocurrency at the Market

Although there are thousands of cryptocurrencies on the market, bitcoin remains the most influential one. First, bitcoin has dominated the crypto market since its creation, with the largest market capitalization. Second, most new investors put their funds in BTC because of its reputation and performance over the years. As such bitcoin maintains the first mover advantage. 

As a result of these factors, BTC has a huge impact on the cryptocurrency market. Many analysts and traders analyse the dynamics of bitcoin to evaluate the performance of the entire market and formulate their trading and investment strategies. Overall, most altcoins follow the direction bitcoin takes. Bitcoin dominance gives a summary of the performance and market direction of bitcoin. 

Source: Reuters

What is bitcoin dominance? 

In simple terms, bitcoin dominance is a ratio of bitcoin market capitalization to that of the total crypto market capitalization (market cap). To get the bitcoin dominance, you divide the total crypto market cap by the bitcoin market cap. In terms of significance, the BTC dominance shows bitcoin’s market trading volume in relation to that of altcoins. By the way, altcoin include all the cryptocurrencies apart from bitcoin. Stablecoins, utility tokens, governance tokens and security tokens form altcoins. It includes all native tokens and coins to DeFi protocols, GameFi, socialFi and the Metaverse, among others.

Market capitalization

In our definition of bitcoin dominance, we used the term market capitalization, popularly referred to as the market cap. Therefore, before we proceed we need to clearly understand what this means. 

Market capitalization means the total value of a specific coin or token in circulation. In terms of bitcoin, it is the value of all the BTC so far mined, and circulating in the market. To get the market cap of a cryptocurrency, you multiply the total supply by its price. 

The total crypto market capitalization is the sum of all the values of cryptocurrencies in circulation. The method is slightly complicated. All you have to do is to calculate the market cap of its individual token or coin, then add them all. What this involves is calculating the market cap of each one of the thousands of cryptocurrencies in circulation. However, these days data analytic firms use suitable software to aggregate market capitalization. CoinMarketCap and CoinGecko are examples of organizations that use software to calculate the market cap of all cryptocurrencies listed there. 

Source: Analyticsteps

How to calculate bitcoin dominance?

We use the following formula to calculate bitcoin dominance:

Bitcoin dominance = Bitcoin market cap/ Total cryptocurrency market cap

As you note from the formula, the numerator is the bitcoin market capitalization while the denominator is the total crypto market capitalization. 

Factors affecting bitcoin dominance

When bitcoin was the only cryptocurrency on the market, the BTC dominance was 100%. This is because it did not share the market with any other cryptocurrencies. However, with time other cryptocurrencies such as ETH came onto the market, meaning that some of the people who usually purchased and used BTC had to buy and hold other cryptocurrencies. As a result, the market share of BTC dropped. In the first days, BTC had a large market share. In most cases, the BTC dominance was above 90%. However, around 2017 many more cryptocurrencies came on the market resulting in the fall of the BTC dominance. 

At one time, the BTC dominance fell to 35% . This occurred during the popularity of initial coin offerings (ICOs). However, with time as the price of the BTC increased and other cryptocurrencies crashed, the value of the BTC dominance increased to around 70%. The ban of bitcoin mining in China and the increased concerns about bitcoin’s carbon footprint resulted in the reduction of its price and a decrease in the BTC dominance. 

Broadly speaking, two factors affect bitcoin dominance. These are its market capitalization which mainly depends on its price and the market cap of all the other tokens and coins. 

Change in Bitcoin market capitalization

Bitcoin’s market capitalization mainly depends on its price. If its price increases the market cap increases. However, if the price falls its market cap decreases. The increase in the supply of BTC also affects the market capitalization. However, the total BTC  in circulation is mostly constant, although there are additions from the mining process. Of course, there are many individuals and firms that mine BTC. A good example is ECOS; the Armenian based BTC mining firm.It has very cheap bitcoin mining leases. For example, you can get a cloud mining lease for just $100. Alternatively, you can purchase mining equipment from ECOS which also hosts the machinery, if need be. Therefore, the rise in BTC supply increases the BTC market capitalization, all other factors being constant. 

Change in total altcoin capitalization

The fluctuation in prices of altcoins determine bitcoin dominance as it increases or decreases the total market capitalizations. Although the prices of altcoins do not fluctuate in the same direction, the market often registers an average increase or average decrease in the prices of altcoins. For example, if the prices of most cryptocurrencies rise it is likely that the total market cap will increase. On the contrary, if the prices of most altcoins fall by large margins, the total crypto market capitalization is likely to decrease. 

The importance of bitcoin dominance

As already mentioned, bitcoin dominance is an important market benchmark and investors who analyse it have an edge against those who do not. First, bitcoin dominance helps to determine the crypto market trend. 

Bitcoin dominance enables analysts  to predict a potential altcoin season and bitcoin bullish periods. The altcoin season is a period when most altcoins perform fairly well. When bitcoin dominance weakens gradually over a long period of time, it means that the altcoin season is setting in. As a result, crypto investors adjust their portfolios. For example, they may increase their holdings of certain altcoins such as ETH and BNB. 

On the other hand, if the bitcoin dominance is firming, it means that a BTC bullish momentum is setting in. In this case, the investors can alter their portfolio by increasing their BTC holdings and reducing the amount of altcoins they own. 

Using bitcoin dominance in trading

 It is important for traders to track bitcoin dominance as it enables them to make informed investment decisions. Infact, they can craft appropriate trading strategies. We have several guidelines that can help traders.

  1. If both the price and dominance of bitcoin are increasing, this is a sign of a potential bitcoin bullish momentum. It is a sign that investing in BTC can bring more returns than in altcoins. 
  2. If the price of bitcoin is rising while its dominance is falling it’s a signal of a potential altcoin bullrun. Traders may opt to trade more of altcoins than BTC
  3. If the price of BTC is falling and the dominance is rising it is a signal of a potential altcoin bear market. In this case, investors should increase their BTC holdings and reduce the amount of altcoins they own. 
  4. When both the price and BTC dominance are falling, it’s a signal for a potential bearish trend for the entire crypto market. It is wise to sell BTC during this period, unless you are a long term BTC hodler. 

Here are additional trading and investment guidelines

You can make different trading decisions if the BTC dominance is at its historic high and low levels.  The historic high level is the possible highest point the BTC dominance can reach, based on previous levels. The historic high level is 74% while the historic level is 35%. 

Source: Bybit 

This chart shows the bitcoin dominance levels between 2017 and 2022. The lowest level it ever reached was 35% while the highest in recent years is about 74%. However, before 2017 BTC dominance was higher than 74%. But we cannot consider that period because there were very few altcoins. 

  1. If BTC dominance is at its historic high level (75%) while its price is rising, you sell BTC.  
  2. If BTC dominance is at its historic high level and its price is decreasing then buy altcoins.
  3. If BTC is at its historic low level and its price is rising, you sell altcoins.
  4. If BTC is at its historic low level and its price is falling, it is best you buy BTC. 

Conclusion

In short, BTC is the most dominant cryptocurrency on the market. This is due to its first mover advantage and the confidence its maximalists have in it. That is why it is important to acquire more of it. One way of acquiring more BTC is through cloud mining. In general, BTC dominance fluctuates on the market depending on several factors such as the change in its price. This article has outlined some trading tips relating to trading bitcoin and altcoins. However, it is important to note that investors and traders should use other market indicators in conjunction with the bitcoin dominance when making investment decisions. 


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