In finance, you can assess how crypto currencies are doing by comparing market capitalization between them. Bitcoin dominance is the value of all Bitcoins added together divided by the total value of all other crypto coins. Let's see why this is an important percentage.
In 2009, Bitcoin was the only crypto currency and Bitcoins dominance was obviously 100%. That changed with the launch of Ethereum in 2015 and especially when its price rocketed up in 2017. Since then, Bitcoin's dominance has hovered around 50% See chart below. At this writing (September 2022), Bitcoin makes up 40% of the total market value of the crypto market.
Of course, you can create a dominance graph of each crypto currency. If you were to make the chart for Ethereum, you would see that Ethereum dominance is now about 20%. This means that Bitcoin and Ethereum together make up over 60% of the total crypto market.
Why is Bitcoin dominance a useful metric?
Bitcoin dominance is a percentage. As such, it is a measure of Bitcoin's relative importance. Why is such a percentage useful to include?
- Crypto prices are extremely volatile, while the dominance chart has a calmer trend.
- Prices of crypto coins do not compare well, but market caps do. A Bitcoin costs let's say 20,000 euros, Shiba Inu one hundred thousandth of a cent. But because the number of Bitcoin in circulation is much smaller than the number of Shiba, the prices per coin say nothing about the total market value.
In short, the percentage of dominance chart allows with to spot trends. It is a clear signal.
How do we interpret Bitcoin dominance?
Bitcoin dominance, of course, is a measure of how important the market considers Bitcoin relative to altcoins. This is more than a number: it has traditionally also been a measure of the state of the crypto market as a whole:
- During the euphoric phase of the market cycle (from mid-bull market onward), Bitcoin dominance typically drops. Investors grab profits in Bitcoin during that phase. To keep the gravy train going, they buy more speculative altcoins. This is known as alt season.
- During times of uncertainty, Bitcoin dominance typically rises. Crypto investors flee to King Bitcoin, which depreciates less than alts in bear markets.
Immediately a side note to the above two rules of thumb. The share of stablecoins in the crypto market has grown rapidly since 2020: from less than 3% to a peak of 16% in June 2022. Because dollar stablecoins (such as USDC and USDT) are the preferred refuge of crypto investors, Bitcoin dominance rises less in times of uncertainty than it used to.
Therefore Bitcoin dominance is unlikely to return to pre-2017 highs: Bitcoin has been overtaken on the left by more speculative altcoins as well as on the right by more conservative stablecoins. And that's fine: it shows that the crypto market is diverse. However, it does mean that BTC dominance is now a less good measure of how much risk investors are willing to take. Stablecoin dominance is now a better measure of that.
Using Bitcoin dominance for trading strategies around alt season
The term altcoin season or alt season is used for the period when altcoins outperform Bitcoin. A bull market often begins with Bitcoin's rise in price and dominance. What traders try to time is the moment when the dominance begins to decline. That is the beginning of alt season.
In the chart at the beginning of this article, you can see that Bitcoin dominance rises hard in the last quarter of 2020. That was when the crypto bull market really took off. Around the turn of 2020/2021, Bitcoin dominance dropped sharply. It was the beginning of alt season.
Future of Bitcoin dominance
It is noteworthy that Bitcoin dominance has not rebounded (yet) in the bear market of 2022. Partly, as mentioned above, this has to do with the flight into stablecoins, a larger market today than in the past. Partly it may have to do - but this is far from certain - with Ethereum, which is increasingly stepping out of the shadow of big brother Bitcoin. For seven years now, Ethereum has proven itself to be a solid technology with a growing number of applications. It is being seen less and less as a high-risk investment - and thus could lose less dominance in bear markets. That keeps Bitcoin's rise in dominance in bear markets in check.