Bitcoin, the first and most well-known cryptocurrency, has long been considered the dominant player in the digital currency market. Its market capitalization, or the total value of all bitcoins in circulation, is significantly larger than that of any other cryptocurrency, and it has consistently accounted for a majority of the total value of the entire cryptocurrency market. However, the concept of “bitcoin dominance” is a bit more nuanced than simply looking at market capitalization. In this essay, we will explore the various factors that contribute to bitcoin’s dominance and examine how it has evolved over time.
What is Crypto Market Capitalization?
Before we begin talking about bitcoin dominance it is important to understand teh fundamentals. Market capitalization commonly referred to as “market cap,” is a metric used to determine the total value of a company or a cryptocurrency. For example, if a company has 1 million shares outstanding and the current price per share is $100, the market cap of the company would be $100 million.
In the case of cryptocurrency, market capitalization is calculated by multiplying the total number of coins in circulation by the current market price of the coin. Market capitalization is used to measure the size of a particular cryptocurrency and how it compares to others in the market. A coin with a higher market cap is generally considered to be more valuable and established than a coin with a lower market cap.
What Is Bitcoin Dominance?
Bitcoin dominance is a metric that measures the percentage of the total cryptocurrency market capitalization that is represented by the value of all bitcoins in circulation. It is essentially defined to be the “described as the ratio between the market cap of Bitcoin to the rest of the cryptocurrency markets”
Bitcoin dominance is used as a way to gauge the relative strength of the Bitcoin network and its position in the larger cryptocurrency market. The higher the bitcoin dominance, the more valuable and important bitcoin is compared to other cryptocurrencies. Bitcoin dominance can be useful to track the evolution of the crypto market, as well as to understand how much influence Bitcoin has in the market.
It can also give an idea of the overall sentiment towards the cryptocurrency market. When Bitcoin dominance is high, it can indicate that investors see Bitcoin as a store of value, while a low dominance can indicate a preference for alternative cryptocurrencies or bearish market sentiment.
The Birth and Early Development of Bitcoin
Bitcoin was created in 2009 by an unknown individual or group of individuals using the pseudonym Satoshi Nakamoto. The idea behind the currency was to create a decentralized, digital alternative to traditional fiat currencies that would be free from government control and manipulation. The first bitcoins were mined using a process called “proof of work”. In this miners solved complex mathematical equations using powerful computers in order to validate transactions and add new bitcoins to the network.
In the early days of bitcoin, there were very few other cryptocurrencies in existence, and the market for them was relatively small. This gave bitcoin a significant first-mover advantage, as it was able to establish itself as the go-to digital currency for people looking to buy and sell goods and services online. As more and more people became interested in bitcoin, its value began to rise, and it quickly became the most valuable cryptocurrency in the world. Look at this chart by Investopedia that gives a brief overview of the price history of Bitcoin.
Bitcoin Dominance in the Early Years
In the early years of bitcoin, its dominance of the cryptocurrency market was nearly complete. In 2011, for example, bitcoin accounted for around 95% of the total market capitalization of all cryptocurrencies. This dominance was due to a combination of factors, including the first-mover advantage mentioned earlier, as well as a lack of competition from other cryptocurrencies. Additionally, the small size of the market and lack of regulatory oversight made it relatively easy for early adopters to accumulate large amounts of bitcoin, further cementing their dominance within the market.
As more people became interested in bitcoin and began buying and trading it, the value of the currency continued to rise. This further solidified bitcoin’s position as the dominant player in the market, as people began to see it as a “safe haven” investment that would continue to increase in value over time. However, it’s important to note that the early years of bitcoin were marked by a significant degree of volatility and speculation, which likely contributed to its dominance during this period.
Rise of Altcoins and Decrease in Bitcoin Dominance
However, as the years passed, more and more cryptocurrencies began to emerge, and the market for them began to grow. These “altcoins” (short for “alternative coins”) were designed to address different use cases and solve different problems than bitcoin. Many of them had distinct technical features that set them apart from the original cryptocurrency.
The emergence of these altcoins began to eat into bitcoin’s dominance of the market. The major responsibility for this goes to the rise of Ethereum and the ERC-20 token standard. In 2013, for example, bitcoin’s market capitalisation still accounted for over 80% of the total value of all cryptocurrencies, but by 2017 that number had fallen to around 40%.
This decrease in bitcoin dominance can be attributed to a number of factors, including the growing popularity and acceptance of altcoins and the introduction of new technologies like smart contracts and decentralized applications (dapps) that are not possible on the bitcoin network.
Additionally, the increasing regulatory scrutiny of cryptocurrencies, particularly in the United States, led to a decrease in the overall market capitalization of cryptocurrencies as a whole. As a result, the percentage of the total market capitalization that was represented by bitcoin also decreased.
The Role of Initial Coin Offerings (ICOs)
Another factor that contributed to the decrease in bitcoin dominance is the rise of initial coin offerings (ICOs). An ICO is a fundraising method in which a new cryptocurrency project sells a portion of its tokens to early backers in exchange for funding. This fundraising method became extremely popular in 2017 and 2018, with many new projects raising millions of dollars in funding in a matter of minutes.
However, many of these projects were found to be fraudulent or had no real use case and were essentially worthless. This led to a decrease in the overall market capitalization of cryptocurrencies, and as a result, bitcoin’s dominance also decreased. It dropped from 90% all the way to 37% in January 2018.
This TradingView graph clearly shows the roadmap of Bitcoin dominance in the last few years.
Other Factors that can affect Bitcoin Dominance include:
Hard forks
A hard fork is a change to the underlying code of a blockchain that creates a new, separate version of the blockchain. When a hard fork occurs, holders of the original cryptocurrency receive an equivalent amount of the new currency. For example, when Bitcoin Cash hard forked from Bitcoin, holders of Bitcoin received an equivalent amount of Bitcoin Cash. This can lead to a temporary decrease in bitcoin dominance as the market capitalization is divided between the two currencies. However, in the long run, if the new fork becomes popular and gains more adoption, it can lead to a more significant decrease in bitcoin dominance. This image is a good illustration of what a hard fork is.
Pre-mined coins
Pre-mined coins are coins that are mined or created before the public launch of a cryptocurrency. This can lead to a decrease in bitcoin dominance as the pre-mined coins are held by a small group of individuals or entities, which can lead to centralization and a lack of decentralization of the network. Additionally, pre-mined coins can be dumped on the market at launch, which can lead to a temporary decrease in price and market capitalization, and subsequently affect bitcoin dominance negatively.
Bull and bear markets
Bull and bear markets can affect bitcoin dominance in different ways. In a bull market, when the overall sentiment in the market is positive and there is a general upward trend in prices, investors tend to have a higher risk appetite and are more likely to invest in higher-risk assets such as cryptocurrencies. This can lead to an increase in the market capitalization of all cryptocurrencies, which can boost bitcoin’s dominance as a percentage of the total market capitalization.
On the other hand, in a bear market, when the overall sentiment in the market is negative and there is a general downward trend in prices, investors tend to have a lower risk appetite and are less likely to invest in higher-risk assets such as cryptocurrencies. This can lead to a decrease in the market capitalization of all cryptocurrencies, which can decrease bitcoin’s dominance as a percentage of the total market capitalization.
To understand what a bull and bear market is, you can refer to this image created by The Motley Fool
Stablecoins
Stablecoins, such as Tether and USDC, are cryptocurrencies that are pegged to the value of a fiat currency or other assets, like gold. They are designed to have a stable value, unlike cryptocurrencies like Bitcoin which can be highly volatile. The popularity of stablecoins has grown in recent years, as they provide a way for investors and traders to move money in and out of the crypto market without being affected by the volatility of Bitcoin and other cryptocurrencies. As a result, stablecoins have the potential to affect Bitcoin’s dominance in the crypto market. If more people start using stablecoins instead of Bitcoin for transactions and trading, the demand for Bitcoin could decrease, which could lead to a decrease in its value and market share. Additionally, stablecoins can also be used to hedge against the volatility of Bitcoin, which could further decrease its dominance in the market.
Introduction of new revolutionary coins
The introduction of new revolutionary coins can have a significant impact on the dominance of Bitcoin in the cryptocurrency market. As more and more alternative coins are developed and gain popularity, they can start to chip away at Bitcoin’s market share. This can lead to a decrease in the dominance of Bitcoin, as more people begin to invest in and use these alternative coins. Additionally, if these new coins offer unique features or advantages over Bitcoin, such as faster transaction times or lower fees, they may become more attractive to users and further erode Bitcoin’s dominance.
How to Use BTC Dominance in Trading
Identifying Altcoin Season
Bitcoin dominance can be used to identify an “altcoin season” by monitoring changes in its percentage of the total cryptocurrency market capitalization. If the dominance of Bitcoin decreases, it may indicate that investors are looking to diversify their investments into alternative cryptocurrencies, and the market is in a bullish phase for altcoins. Conversely, if the dominance of Bitcoin increases, it may indicate that investors are becoming more confident in Bitcoin as a store of value and less interested in investing in alternative cryptocurrencies, signalling a bearish phase for altcoins. This Flowchart by YourCryptoLibrary is helpful in understanding Altseason
Identifying market trends
When Bitcoin’s dominance is increasing, it may be a good time to invest in the coin as it is likely to have a positive performance in the market. This can be done by buying Bitcoin directly or through a Bitcoin ETF.
According to CoinMarketCap, “when both price and bitcoin dominance rise, traders tend to flock to Bitcoin, as it is the strongest horse in the race. On the other hand, when Bitcoin’s price increases, but the dominance metric falls, it suggests altcoin season is in full force. The opposite is true for when Bitcoin is falling while the dominance rises, it shows an altcoin bear market. Finally, when Bitcoin and its dominance are falling in unison, the entire crypto market is in a bear trend.”
Diversifying your portfolio
If the BTC dominance is low and the BTC price is on an uptrend, it may be a good idea to diversify your portfolio by investing in other alternative coins. This can help to reduce your risk and increase your chances of profiting from a market downturn.
Risk Management
For example, if bitcoin dominance increases by a huge margin, traders can choose to not buy altcoins for a while. That can be helpful in protecting your funds.
Look at this table by CoinTelgraph for a summarised view of how to use bitcoin dominance while trading
Current scenario of Bitcoin Dominance
The dominance of Bitcoin was about 100 per cent when it was the only cryptocurrency that could be traded on exchanges. Since there are more cryptocurrencies in the market now than ever before, their dominance is undoubtedly less than 100%, but it is neither a good nor a bad thing. It is merely a tool that might help us gain a clearer understanding of the direction in which the crypto space is headed.
Although the dominance of Bitcoin is a fascinating statistic to examine, it is important to remember that this statistic does not accurately reflect the true value of the cryptocurrency, particularly in light of forked and pre-mined coins that have an extremely unnatural impact on the total market cap. It is also important to note that the market cap does not necessarily indicate an increase in cash flow. It is merely an assessment based on the active supply and the going rate of the market.
It’s important to note that the concept of bitcoin dominance is constantly evolving and can be influenced by a variety of factors, including market sentiment, regulatory developments, and the emergence of new technologies. As the cryptocurrency market continues to mature and new projects continue to emerge, bitcoin’s dominance will also evolve in the future.
To conclude
By monitoring changes in bitcoin dominance, investors can identify periods where alternative coins, or “altcoins,” may be performing well and gaining more attention. Overall, bitcoin dominance is a valuable tool for investors to understand the dynamics of the cryptocurrency market, but it should be used with caution to make a sound financial decision. It’s important to note that bitcoin dominance is just one indicator among many, and investors should not base their investment decisions solely on this metric. Instead, it should be used in conjunction with other technical and fundamental analyses to make a more informed decision. Additionally, it is crucial for investors to keep in mind that the cryptocurrency market is highly volatile and that any investment carries a level of risk. Therefore, it’s important to invest only what you can afford to lose and to conduct thorough research before making any investment decisions.
It’s important to note that the concept of bitcoin dominance is constantly evolving and can be influenced by a variety of factors, including market sentiment, regulatory developments, and the emergence of new technologies. As the cryptocurrency market continues to mature and new projects continue to emerge, bitcoin’s dominance will also evolve in the future.
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