Bitcoin Dominance: A Beginner's Guide

Today, there are some 23,000 digital assets in the crypto market, but one continues to stand out among the rest: bitcoin, the original cryptocurrency. Its influence on the market is massive, and its standing compared to all other assets continues to be an important indicator of the crypto market’s overall health. Historically, traders and analysts have used a ratio called bitcoin dominance, or BTC dominance, to guide trading behavior and gather insights on where the market is headed next. If you’re interested in buying bitcoin, check out Trust Wallet, a secure, user-friendly crypto wallet trusted by millions of users worldwide. Buy, sell, and store BTC in one simple and easy-to-use interface.

What is Bitcoin?

Bitcoin, often referred to as BTC, is a digital currency that was created in 2009 by a person or entity under the pseudonym Satoshi Nakamoto. Unlike with traditional, or fiat, currencies, BTC transactions are recorded on a decentralized ledger – the Bitcoin blockchain. The purpose is to create a digital payment network that could function without a central authority, such as a government or a bank. People often refer to bitcoin as “digital gold” due to its limited supply (21 million coins will be minted).

Why is BTC important in today’s crypto market?

Bitcoin’s underlying technology has paved the way for thousands of other digital assets and the diverse crypto ecosystem we see and use today. For many investors, bitcoin is an entry point into crypto, a gateway to explore and invest in other digital assets. Bitcoin’s dominant market share means that drastic changes in its performance can often have a direct impact on the wider market. Traders have attempted to quantify this phenomenon using a ratio called BTC dominance. The idea is that bitcoin’s market capitalization compared to the rest of the crypto market can potentially signal upcoming trends, such as a bearish turn or bull run.

What is Bitcoin Dominance?

Bitcoin dominance is a ratio of bitcoin's market capitalization to the total market capitalization of all cryptocurrencies combined, most commonly expressed as a percentage.

For example, if BTC dominance stands at 60%, it means that bitcoin's capitalization represents 60% of the total market cap of all cryptocurrencies. You can use this formula to calculate bitcoin dominance:

Bitcoin dominance = (Bitcoin market cap / Total crypto market cap) * 100

Why is BTC dominance important?

The dynamics between bitcoin and the rest of the market is a crucial relationship that every trader should understand. When BTC dominance is high, bitcoin has a strong influence over the overall market’s direction. In the past, bitcoin’s price movements have often created a domino effect, influencing the market sentiment and the trends in the prices of all other cryptocurrencies, collectively known as altcoins.

Several factors can influence bitcoin dominance, including regulatory changes, market sentiment, and major events. Here are a few examples that have or may affect BTC dominance:

• Bitcoin dominance recently crossed the 50% mark — its first time in over two years — following major investment firm BlackRock’s filing for a Bitcoin spot exchange-traded fund (ETF).

• The Bitcoin Halving, which occurs approximately every four years and cuts the mining rewards in half, has been shown to induce bitcoin market demand, thereby increasing its dominance.

• The increased popularity of stablecoins, innovations such as NFTs and DeFi, and introduction of token standards like ERC20, have gradually decreased bitcoin’s market share, from over 90% to a little over 50% as of July 2023.

A Brief History of BTC Dominance

From the early years of the crypto market and up to 2017, bitcoin held a dominant position over the few altcoins that were in existence. Notable events during this period include the introduction of several new altcoins — including litecoin (LTC), Ripple’s XRP, and bitcoin’s biggest rival to this date: ether (ETH).

2017 was the first time bitcoin dominance dipped below the 90% mark as a result of the “ICO boom” that rocked the crypto market. ICO, short for initial coin offerings, is a crypto project fundraising mechanism that garnered mainstream attention during 2017 and early 2018. Many investors moved their funds from bitcoin into often speculative projects with the hopes of earning a significant return on investment. This caused BTC dominance to decline to its lowest point of around 32% in early 2018.

BTC dominance eventually recovered to around 72% during bitcoin’s record-breaking bull run in 2021. It has since hovered around the 50% mark.

Bitcoin Dominance and Altcoins

Any digital asset that is not bitcoin is called an alternative coin, or altcoin. Popular examples include ether (ETH), cardano (ADA), and BNB. The relationship between bitcoin dominance and altcoin performance is often inverse.

An increase in bitcoin dominance may suggest that market participants are feeling risk-averse, hence, shifting their focus from altcoins to bitcoin, which is widely perceived as the safest option in the market. On the other hand, a decrease in bitcoin dominance may indicate a growing interest in altcoins and a willingness to explore higher-growth potential projects — as evidenced during 2017-18’s ICO boom and 2021’s “altcoin season.”

The logic behind the concept of BTC dominance is that bitcoin is in a constant “fight” over market share with every altcoin. Compelling altcoins like ETH that enter the market often dilute BTC’s market share and weaken BTC dominance. Even so, bitcoin — till now — has continued to recover and account for at least 50% of the crypto market despite the emergence of thousands of new altcoins every year.

How to Monitor Bitcoin Dominance

There are several tools and websites you can use to track BTC dominance. CoinMarketCap is a popular platform that provides real-time data on the metric, among a host of other cryptocurrency indicators.

Regularly monitoring bitcoin dominance can offer valuable insights into market trends, shifts in investor sentiment, and potential opportunities for investment or portfolio adjustments. Let’s dive into a few ways traders use BTC dominance when doing their market research:

• Altcoin season. Many analysts theorize that bitcoin bull runs are typically followed by an upward trend across all altcoins. In this case, the weakening of bitcoin dominance could indicate the start of a new altcoin season.

• Market sentiment. Bitcoin dominance and bitcoin’s price are often tracked simultaneously to estimate the market’s general trend. For example, one potential signal for a bitcoin bull run is when both price and dominance are going up. Conversely, a bear market can be a potential outcome when bitcoin’s price and dominance are going down.

Note that bitcoin’s price going up does not indicate dominance will increase and vice-versa. There have been instances of BTC dominance increasing while its price was going down. This scenario could potentially anticipate a downward trend for altcoins.

Conclusion

As the original cryptocurrency, bitcoin often sets the tone for the entire crypto space with its performance. Traders frequently look to BTC dominance as a metric to evaluate the health of the crypto market and anticipate its future movements.

However, it’s important to note that bitcoin dominance is just one of many tools used by traders and investors. It should by no means be seen as a sole indicator or driver of market behavior.

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