The dominance index helps investors and traders to understand the state of the crypto market and the sentiments of its participants. If bitcoin dominance changes, it indicates either a growing interest in alternative coins (altcoins) or an increase of BTC itself.
The prices of all altcoins are strongly correlated with bitcoin dominance. This is why this index is used to assess market sentiment. Most of the time, altcoins are either in a downtrend or an uptrend relative to bitcoin. Their prices are stable only when bitcoin dominance is rising and the price does not change, or when the dominance falls with the price.
When bitcoin dominancen grows, altcoins lose market share and price against BTC. This often happens when bitcoin has gone through consolidation and enters a bullish phase. Historically, bitcoin most often starts a rally and the other cryptocurrencies follow.
The period when bitcoin loses dominance and cedes it to other cryptocurrencies is called the altcoin season. At this time, altcoins are growing strongly, their capitalization exceeds BTC and investors diversify their portfolio by purchasing altcoins.
How to calculate bitcoin dominance
Here’s how bitcoin dominance is calculated: first, divide the market capitalization of BTC by the market capitalization of all cryptocurrencies, then multiply the result by 100.
So, if the market capitalization of BTC is $100 billion and the total market capitalization of all cryptocurrencies is $200 billion, the bitcoin dominance would be 50%.
How bitcoin dominance has changed historically
- Early years: high dominance. Bitcoin was created in 2009 and for the first years dominated almost 100%. In 2013, there were only a few altcoins on the market and BTC dominance was 94%.
- 2017: the fall of dominance. In February 2017, bitcoin dominance was 96%, but by early 2018, it had fallen to 37%. This was the time of the ICO boom, when Ether and other altcoins became popular.
- 2018-2020s: regaining dominance. After a sharp drop, bitcoin dominance started to recover in 2018, when the altcoin market experienced a downturn. In 2019, the index returned to around 70%, and by 2020 it was hovering between 60-70%.
- 2021: declining dominance. In 2021, the rise of decentralized finance (DeFi) and non-fungible tokens (NFT) reduced bitcoin dominance again. Its capitalization grew strongly, but its market share decreased amid the popularity of new cryptocurrencies and technologies. By the end of 2021, the index fell below 40%.
- Present: in April 2024 bitcoin dominance is almost 56%.
What affects bitcoin dominance
Internal factors (cryptocurrency ecosystem)
- New altcoins. The launch of new cryptocurrencies can reduce bitcoin dominance. For example, with the rise of DeFi tokens and NFTs bitcoin market share has declined.
- Technology improvements. Upgrades of the Bitcoin network, such as scaling and security enhancement solutions, can build investor confidence and increase its dominance.
- Speculation by traders. When interest in speculative altcoins increases bitcoin dominance may decrease.
External factors (macroeconomics)
- Regulatory changes. If regulators support bitcoin and restrict the use of any altcoins, investors may switch to BTC. This will increase its dominance.
- Searching for a “safe haven”. Bank failures or economic downturns often increase bitcoin dominance: at times like this, investors see bitcoin as an asset that can preserve or even enhance their investments during periods of general (or local) economic turbulence..
- Money and credit policy. When interest rates are low, investors often seek higher-yielding assets such as bitcoin, which subsequently increases its market share.
Bitcoin dominance helps analyze trends and sentiment of the crypto market. A high index shows that bitcoin became a safe asset, while a decrease in dominance signals a growing interest in altcoins and new technologies in the crypto industry.