What is Bitcoin Dominance and How to Use It in Market Evaluation

Understanding Bitcoin Dominance:

Bitcoin dominance refers to the percentage of Bitcoin's market capitalization relative to the entire cryptocurrency market. As of July 2024, Bitcoin's dominance stands at a four-year high of 53.5%, while Ethereum, the second-largest cryptocurrency by market cap, holds a 17.5% share. The remaining market, including stablecoins, constitutes 29%, according to CoinMarketCap.

• Trends in Bitcoin Dominance:

Bitcoin's dominance has been on an upward trend since the end of 2022, rising from a local minimum of 38%. The lowest point in the past six years was 32.5%, recorded in early 2018. You can view the Bitcoin dominance chart on platforms like TradingView.

• Factors Influencing Bitcoin Dominance:

Bitcoin dominance is calculated as the ratio of Bitcoin's market capitalization to the total market capitalization of all cryptocurrencies. Several factors influence this metric, including:

- Changes in Bitcoin's price

- Valuations of altcoins

- Growth in the use of stablecoins

- Overall market conditions

- Emergence of new cryptocurrencies

• Using Bitcoin Dominance in Market Analysis:

Bitcoin dominance is a crucial tool for analyzing the cryptocurrency market. It's used to calculate other popular metrics, such as the Fear and Greed Index.

• Interpreting Changes in Bitcoin Dominance:

Traditionally, a decrease in Bitcoin dominance is viewed by traders, investors, and analysts as the beginning of an "altcoin season," where tokens and coins other than Bitcoin outperform the leading cryptocurrency. Conversely, an increase in Bitcoin dominance signals the end of altcoin market growth relative to Bitcoin.

• Impact of New and Defunct Projects:

The dominance index can fluctuate due to the introduction of new projects or the cessation of existing ones. Since the index is calculated by monitoring services like CoinGecko or CoinMarketCap, the addition of new assets can impact Bitcoin's market share.

For instance, from 2021 to January 2024, over 70% of cryptocurrencies listed on CoinGecko ceased to exist, with the peak occurring in 2021 when 5,700 cryptocurrencies were removed. In 2022, 3,500 cryptocurrencies were delisted.

• Consideration of Tracked Tokens:

The number of tracked tokens included in the dominance calculation can vary over time. Currently, CoinGecko calculates the dominance based on data from nearly 15,000 tokens, with Bitcoin's dominance above 53%. In contrast, in 2018, the dominance was based on just over 1,000 crypto assets, with Bitcoin's share slightly over 32%. This means that the number of included tokens has increased 15-fold, while the share of the leading cryptocurrency has grown by more than 1.6 times.

• Alternative Approaches:

Some analysts argue against such broad comparisons of Bitcoin's share and propose more flexible tools. For example, there are alternative indices that exclude the share of stablecoins from calculations, while others include only the top 100 cryptocurrencies by market cap.