Bitcoin Dominance Explained

While Bitcoin (BTC) isn’t the only player in the crypto market anymore, it still holds significant influence as crypto’s first and largest asset. Given its size and reputation, many crypto traders and investors pay close attention to BTC’s price action to guide their trading strategies. 

One of the main metrics used to measure Bitcoin’s influence on the market is called “Bitcoin dominance”. This metric describes the market share of Bitcoin to the global crypto market. In this article, we’ll explore what Bitcoin dominance is and how you can use it to support your trading strategies.

What is Bitcoin Dominance?

Bitcoin dominance, also known as the Bitcoin Dominance Index/ratio, is the percentage that Bitcoin makes up of the total cryptocurrency market capitalisation. In other words, it measures the market share of Bitcoin relative to other cryptocurrencies. 

Bitcoin dominance can be calculated by dividing the market cap of Bitcoin by the total cryptocurrency market cap and then multiplying by 100, using this formula:

Bitcoin dominance = Bitcoin market cap / Total cryptocurrency market cap x 100

For example, Bitcoin’s market cap at the time of writing is $545 billion, and the global crypto market cap is $1.2 trillion. This means that 44.6% of the global crypto market cap is dominated by Bitcoin. 

$545 billion / $1.2 trillion x 100 = 44.6%

Thankfully, websites like CoinMarketCap and CoinGecko list Bitcoin market dominance in real time, so you don’t have to crunch the numbers yourself. 

To gain a better understanding of what Bitcoin dominance is, traders need to understand what market capitalisation is — and why it’s important.

Recommended Reading: Crypto Market Cap Explained

Why is Bitcoin Dominance Important?

Bitcoin dominance is often used by traders and investors as a general benchmark for the health and stability of the cryptocurrency market. 

When Bitcoin dominance is high, it means that Bitcoin is dominating the market and other cryptocurrencies are struggling to gain market share. This can be a sign that investors are more interested in Bitcoin than other cryptocurrencies, and may be a reflection of the wider market sentiment. Generally, when market conditions are bearish, crypto investors tend to move out of riskier small- or mid-cap altcoins and reinvest in established large-cap assets like Bitcoin or stablecoins. 

On the other hand, when Bitcoin dominance is low, it can be an indication that altcoins are outperforming Bitcoin and investors are diversifying their holdings across a wider range of cryptocurrencies. During a bull market, we generally see bitcoin dominance drop as investors move up the risk curve into smaller cap altcoins. 

While there's no exact science to using Bitcoin dominance to examine bullish versus bearish conditions, some believe it may indicate a change in market sentiment. Traders and investors often compare Bitcoin dominance with the influential “Fear and Greed Index” to get a greater grasp of general market sentiment. 

Recommended Reading: Crypto Fear and Greed Index Explained

Why does Bitcoin Dominance Change?

The simple reason Bitcoin dominance changes is because Bitcoin’s market cap rises or drops relative to the rest of the crypto market. However, there are various factors that influence this shift in market share, including:

Emergence of new coins: Bitcoin dominance reached its peak of 95% in 2017, in a time where competition across the crypto market was pretty limited. However, since then we have witnessed unprecedented innovation and growth across the industry, which has coincided with the proliferation of new projects and coins. At the time of writing, there are over 23,000+ crypto coins. As these new coins emerge and grow in popularity, they can eat into the market share of Bitcoin’s dominance. However, whether they can maintain this hype or not, is another story.  

Risk Appetite: As mentioned previously, investors tend to allocate into and out of BTC and other assets depending on market conditions and general sentiment. Generally, when the crypto market is bullish and prices are rising across the board, Bitcoin dominance usually decreases. Conversely, when the market is bearish and prices are falling, Bitcoin dominance tends to increase. 

Recommended Reading: Bull vs Bear Market: What’s the difference?

Stablecoin Adoption: Crypto investors traditionally perceived Bitcoin to be the safest cryptocurrency due to its age and maturation. However, now that stablecoins have become more widely accessible, they’ve become the go-to asset for many investors seeking ‘stability’ amidst market uncertainty. Interestingly, the rise of stablecoins has put sustained pressure on Bitcoin dominance during bear market conditions as investors try to protect their funds without converting to fiat. The more investors rotate into stablecoins over BTC during bear markets, the lower Bitcoin dominance may go. 

Recommended Reading: Crypto Market Volatility Explained

Investment Considerations

Bitcoin dominance is a popular metric, especially amongst Bitcoiners, that can provide useful insights into trends and the overall state of the cryptocurrency market. Depending on the trend within the ratio and Bitcoin’s price, investors can determine whether the momentum is with altcoins or Bitcoin.

However, Bitcoin dominance is not without its limitations. Crypto markets are complex ecosystems and no system can be simplified down to the use of one indicator. As with all technical indicators and signals, Bitcoin dominance should never be used solely to make trades. 

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