Bitcoin dominance is a metric that measures the total market capitalization of Bitcoin versus the total market capitalization of the rest of the cryptocurrencies combined. The way Bitcoin dominance is calculated is by taking the total market capitalization of Bitcoin and dividing it by the total market capitalization of all cryptocurrencies. The result which you get tells you the dominance of Bitcoin over all other cryptocurrencies.
The dominance of Bitcoin shows what sentiment the market is currently having against Bitcoin. In broader terms, it shows how much traders and investors feel confident about Bitcoin as an investment option. The higher the dominance, the higher it will attract the attention of investors and gain their trust as well. Conversely, a falling level of Bitcoin dominance indicates that investors and traders are showing confidence in other cryptocurrencies or altcoins.
Why Does Bitcoin Dominance Matter?
First of all, we need to remind ourselves that the cryptocurrency market is very volatile and it is constantly evolving. Bitcoin dominance is an indicator that gives the reflection of this volatility. The fluctuation in the value of Bitcoin dominance can provide investors and traders insights into the current state of the crypto market. As mentioned earlier, if the value of Bitcoin dominance is high, it means that Bitcoin is performing considerably well compared to other crypto tokens.
Conversely, if the value of Bitcoin dominance is low, it indicates that the other crypto tokens are performing better. The measurement of Bitcoin dominance is instrumental in traders making their next plans for buying or selling crypto assets. The higher Bitcoin dominance value will make users inclined towards investing in Bitcoin, and the lower Bitcoin dominance value will force users to diversify their crypto portfolios with other cryptocurrencies like altcoins.
The other aspect that makes Bitcoin dominance a metric that should be taken into consideration is that if the Bitcoin dominance is high, then the overall sentiment of the market is perceived to be bullish. This scenario will make traders invest not only in Bitcoin because they have confidence in its value but in other crypto tokens as well. The exact opposite of this scenario is if the Bitcoin dominance is low, then the market sentiment is perceived to be bearish. Therefore, people are less confident in the value of Bitcoin and other cryptocurrencies.
Bitcoin dominance also gives the metric of the performance of Bitcoin compared to other crypto tokens. A higher Bitcoin dominance will result in people focusing more on Bitcoin compared to other crypto assets and vice versa. Lastly, Bitcoin dominance can also be used as an indicator to perceive the adoption of Bitcoin and cryptocurrency as a whole as a form of payment. The higher the Bitcoin dominance, the more likely people will feel confident in using it as a form of payment, which will help increase the legitimacy of cryptocurrency.
Investors need to understand the significance of Bitcoin dominance and how it can be used as an indicator of market trends. This can help investors make informed decisions about their investment portfolio and take advantage of market opportunities as they arise.
How Is Bitcoin Dominance Calculated?
To calculate Bitcoin dominance, you need two key pieces of data:
- Bitcoin Market Capitalization (BTC Market Cap): This is the total value of all the currently existing Bitcoins in circulation, calculated by multiplying the current price of one Bitcoin by the total number of Bitcoins in circulation. You can find this data on various cryptocurrency market tracking websites.
- Total Cryptocurrency Market Capitalization (Total Market Cap): This is the total value of all cryptocurrencies combined. It is calculated by adding up the market capitalizations of all cryptocurrencies in existence.
- Formula: Bitcoin Dominance (%) = (BTC Market Cap / Total Market Cap) x 100.
The resulting value in percentage gives you the Bitcoin Dominance value. At the time of writing this article, the Bitcoin market capitalization is $583.5 Billion, and the total cryptocurrency market capitalization is $1.14 Trillion; Bitcoin dominance would be:
Bitcoin Dominance = ($583.5 Billion/$1.14 Trillion) x 100 = 51.8%. The data for this calculation was taken from coinmarketcap.com.
The Rise of Bitcoin Dominance in the Cryptocurrency Market
In recent times, we have seen a great increase in the adoption of Bitcoin and cryptocurrency in general. In the early days of Bitcoin, its dominance was greater than 90% because, at the time, it had very little or no competition in front of it, meaning there weren’t any other coins like altcoins with whom it would compete.
The value has gradually decreased in the coming years, and as of today, when this article is being written, Bitcoin dominance stands at approximately 52%. While this value does feel low compared to more than 90%, it still shows that institutional investors value Bitcoin higher compared to all other cryptocurrencies combined.
Financial institutions and corporations have been investing in Bitcoin and using it as a hedge against inflation, which has increased the demand for Bitcoin. This, in turn, has driven up the value of Bitcoin and increased its market share. Another factor contributing to the rise of Bitcoin dominance is the increasing adoption of Bitcoin as a form of payment.
Since billion-dollar companies like Microsoft, AT&T, and most recently, Ferrari has started accepting Bitcoin as a payment option, it shows that they have great hopes for the potential of Bitcoin and crypto in general. This drives the confidence of more investors and traders to invest in Bitcoin, which becomes the driving force in increasing its dominance.
These days, there is a lot of discussion and deliberation going on regarding the acceptance of several applications for spot Bitcoin ETFs. Initially, it looked like the SEC would prove to be a major hurdle in the release of spot Bitcoin ETFs because of their reluctance to accept applications from several Billion-dollar companies who wanted to register their spot Bitcoin ETFs.
However, recent court decisions ruling against the SEC due to their inability to provide proper justification for rejecting these applications and causing delays without stating any reasonable cause have increased the confidence of the crypto supporters that these applications will be approved soon by the SEC. Once that happens, everyone is expecting Bitcoin to see another exponential rise in its value. And if this happens, then Bitcoin’s dominance will also increase with it.
The country of El-Salvador became the first country to recognize Bitcoin as a legal tender back in 2021, followed by the Central African Republic. While two countries out of the entire world seem like a very short list in terms of judging Bitcoin’s popularity among governments and financial regulators, many other countries are working on frameworks to establish clear regulations for the cryptocurrency market.
This effort has given some semblance of hope that they are not planning to reject Bitcoin and cryptocurrency entirely and are willing to accept crypto in broader terms once they have mapped out all the legalities, which means that the legitimacy and credibility of Bitcoin are not questioned, and it is here to stay.
All these signs boost investors’ confidence in Bitcoin, which results in them investing more capital in it, further expanding its market dominance.
Correlation between Bitcoin Dominance and Crypto Market Trends
The relationship between Bitcoin dominance and crypto market trends is complex and ever-changing. Bitcoin dominance can provide you with an indicator of the overall performance of the crypto market. At the same time, the market trends can also impact the value of Bitcoin’s dominance. However, this relationship is not always straightforward, and sometimes, other factors should be taken into consideration before we can judge the value of Bitcoin dominance.
There can be instances where Bitcoin dominance and crypto market trends are not on the same page, meaning they are moving in the opposite direction from each other. For example, during a bear market, some investors may see Bitcoin as the safest option to invest in because they are not confident about the value of other crypto assets. This means that Bitcoin’s dominance will increase when other crypto assets are seeing a decline in their value.
Conversely, during a bull market, some investors might notice that instead of investing in Bitcoin, another altcoin shows more promising signs of growth, and they see more return on their investments if they invest in that particular coin instead of Bitcoin, which will result in a decrease in Bitcoin’s dominance.
Furthermore, the correlation between Bitcoin dominance and crypto market trends can also be affected by factors such as regulatory changes, institutional investments, and technological advancements. For instance, regulatory changes that support the growth of cryptocurrencies can lead to an increase in crypto market trends and also boost Bitcoin’s dominance. Similarly, institutional investments in Bitcoin can also drive up the crypto market trends and increase Bitcoin dominance.
Impact of Altcoins on Bitcoin Dominance
Altcoins, or alternative cryptocurrencies to Bitcoin, significantly impact Bitcoin’s dominance in the crypto market. The value of Bitcoin dominance can be affected depending upon the performance of altcoins.
If altcoins (like Ethereum, XRP, Matic, Solana, etc.) are performing well in the crypto market and their market capitalization increases, it can decrease Bitcoin’s dominance. The reason for this occurrence will be due to the focus of investors and traders shifting away from Bitcoin because they see the altcoins as a more lucrative option to invest in. Conversely, a poor or mediocre performance from the altcoins in the crypto market might see them losing investors’ interest, and they will pull their capital from other altcoins and put the said capital into Bitcoin, therefore increasing its dominance.
Suppose you want to observe the impact of altcoins on Bitcoin dominance. In that case, you can always look at the trading volume and liquidity information, which is available on various crypto tokens performance tracking websites. When the altcoins have high trading volume and liquidity, it means that Bitcoin is facing increased competition from them for dominance in the market and vice versa.
Limitations of Bitcoin Dominance
While Bitcoin dominance is considered a popular indicator to track the performance of Bitcoin in the crypto market, it has some drawbacks associated with it, which simply cannot be ignored.
One fact to observe is that when new cryptocurrencies are launched in the market, they garner interest in them, which results in Bitcoin’s dominance decreasing. Given that this is not a while occurrence and new crypto tokens are launched periodically, this means that whenever such a scenario occurs, Bitcoin dominance trends downward. This doesn’t bode well for Bitcoin Dominance to be seen as a reliable indicator of the market’s performance if your objective is to analyze the long-term performance of the crypto market.
One other factor to consider here is the total market capitalization of Bitcoin is lower than what is calculated. This is because some Bitcoin might have been lost or forgotten in old wallets. Since the world of cryptocurrencies can be pretty tricky, it’s not a good idea to make all your trading decisions based only on Bitcoin’s popularity.
The ideal way for you to judge the performance of the market is by doing your due diligence and considering other factors and technical indicators, along with Bitcoin dominance, to calculate your next move in the highly volatile world of crypto.
Will Bitcoin Maintain Its Dominance?
It will be very difficult for other coins to dethrone Bitcoin from its perch as the largest cryptocurrency token by market capitalization. Bitcoin has taken advantage of being first come, first serve, meaning that it is the first crypto token to exist and was known throughout the world before other altcoins came onto the scene. This makes bitcoin the go-to cryptocurrency token, which many investors and traders would prefer to buy or sell compared to other altcoins.
Also, Bitcoin doesn’t have an unlimited supply that can be mined. The total number of Bitcoin tokens that will come into circulation once the pool is exhausted is set to be 21 million, according to the Bitcoin white paper, which has made it a very exclusive commodity to hold. It is a major reason that drives the price of the Bitcoin token to higher value and also why Bitcoin has become a dominant force in the crypto market.
Nevertheless, you should remember that the crypto market is very dynamic, and the emergence of new technology, the introduction of new crypto regulations, and the emergence of new use cases can significantly impact the market dynamics and drive the value of Bitcoin dominance.
Conclusion
Bitcoin’s dominance is a crucial indicator for cryptocurrency investors, providing valuable insight into the overall state of the crypto market, the performance of other digital assets, and the adoption of cryptocurrencies. By paying attention to Bitcoin’s dominance, investors can make informed decisions about their investments and take advantage of market opportunities. However, we must reemphasize the point that relying on Bitcoin dominance alone isn’t a good practice, and you should always consider other factors, do technical analysis, and keep up to date with the current happenings of the crypto market before deciding to invest in the crypto market.
