Bitcoin is often seen as the ‘king’ of cryptocurrencies, but how can we know how much control it really has over the market? The answer lies in an indicator called Bitcoin ‘dominance’, a fundamental measure to understand the role of this cryptocurrency compared to others. In this article, we will explore how Bitcoin dominance works, why it is important, and how it can help traders and investors make strategic decisions to invest in cryptocurrencies. We will delve particularly into the concept of Bitcoin’s “true” dominance, and how this can be a useful indicator for making investment and risk management decisions.
What is Bitcoin Dominance?
The “dominance” of Bitcoin is a measure that indicates the percentage of Bitcoin’s market capitalization (market cap) compared to the total capitalization of all existing cryptocurrencies. In other words, it is Bitcoin’s market share compared to the total cryptocurrency market.
The “dominance” of Bitcoin is calculated using the following formula:
Bitcoin dominance = {(Market Cap BTC) / (Market Cap of all cryptocurrencies)} * 100
To better visualize this concept, one can calculate the market cap of Bitcoin using the circulating supply and the price. At the time of writing, the price of Bitcoin (BTC) amounts to approximately 57,050 dollars. In 2024, the circulating supply of BTC will reach 19.6 million units. Multiplying these two values gives approximately 1,118 billion dollars of market cap, which represents the current valuation of BTC.
To calculate the Bitcoin dominance ratio, you must then divide this market cap by the overall market cap of criptovalute, which currently amounts to 1.95 trillion dollars. Consequently, the current “dominance” of Bitcoin is around 57%. This percentage can vary slightly depending on the sources and methodologies used to calculate it.
How to calculate the “true” Dominance of Bitcoin and why it is important for traders and investors
Many analysts believe that the standard dominance of Bitcoin does not accurately reflect its leadership position, because it also includes cryptocurrencies that are not direct competitors, such as stablecoins. For this reason, the concept of ‘true’ dominance of Bitcoin has developed.
For example, including stablecoins, which are not competitors of Bitcoin but rather tools for trading and liquidity, could distort the evaluation. These are designed to maintain a stable value tied to a fiat currency (for example, the US dollar), and allow investors to invest in crypto without having to endure huge market volatility risks. USDT and USDC were the first generation of stablecoins, occupying an increasingly significant part of the market and thus leading to the creation of a brand new ratio called the Stablecoin Supply Ratio (SSR), which is calculated by dividing the market cap of Bitcoin by the total market cap of the stablecoins.
Furthermore, the true dominance should focus only on assets that share Bitcoin’s main objective: being a decentralized currency and a store of value. The exclusion of some cryptocurrencies, such as platform tokens or utility tokens, would therefore be desirable.
In this way, a much more “truthful” index of Bitcoin’s position within the sector would be obtained, but it would also become more difficult to calculate, as there is currently no simple way to keep track of all the coins to exclude. Most platforms indeed only show the basic dominance ratio, in addition to the main total metrics: for example, you can access the Bitcoin dominance chart on TradingView with the symbol BTC.D, as well as the total cryptocurrency market capitalization with the symbol TOTAL.
To simplify the calculation, therefore, one could exclude from the total capitalization only the main stablecoins (USDT and USDC), which currently represent about 154 billion dollars, thus obtaining the following chart for the true dominance of Bitcoin:
True Dominance of BTC = {(Market Cap BTC) / (TOTAL – USDC – USDT)} * 100
Finally, in order to represent the trend of the Altcoin market compared to that of BTC, the inverse ratio to the true dominance of Bitcoin can be plotted on the chart. In this case, however, it is preferred to exclude from the total capitalization not only stablecoins but also BTC and ETH (Ethereum), using the symbol TOTAL3 from TradingView. Ethereum, in fact, although it is an Altcoin, has now carved out such a market share that it distinguishes itself from the others as the main alternative to BTC.
This gives the true ratio between the market cap of Altcoins and that of Bitcoin, widely used to monitor when Altcoins grow more than BTC (Bitcoin dominance decreases), indicating the probable start of the so-called “Altseason”, like the one seen at the beginning of 2021:
1 / (True Dominance of BTC) = {(TOTAL3 – USDC – USDT) / (Market Cap BTC)} * 100
How to use the “true” Bitcoin Dominance to understand crypto market trends
As mentioned, the true dominance is often used as an indicator of Bitcoin’s position in the cryptocurrency market and to assess market sentiment.
When the dominance increases, it means that Bitcoin is gaining more value or stability compared to other cryptocurrencies, suggesting that investors are less inclined to take risks. On the contrary, a decrease in Bitcoin’s dominance could indicate an increase in interest in Altcoins, and this usually goes hand in hand with an increase in risk appetite.
Despite everything, Bitcoin has always managed to maintain a relatively strong market capitalization. Therefore, when Bitcoin’s dominance is somehow questioned, it is an excellent signal for new investment opportunities. Typically, the BTC dominance ratio drops when a bull market is underway or perhaps a new coin is emerging (see Ethereum from 2015 to 2018) or something equally significant happens. Ultimately, it is an important metric because it provides a more accurate picture of Bitcoin’s competitiveness compared to cryptocurrencies that aim to serve the same role as a store of value or medium of exchange.
Final considerations and usefulness for those who want to invest in cryptocurrencies in 2024
Whether one is an experienced trader or a new investor, understanding Bitcoin dominance, and in particular the ‘true’ dominance, can offer a strategic advantage in an ever-evolving market. Carefully following this indicator could indeed help to better navigate the complex world of cryptocurrencies, allowing for a quick understanding of whether the market is about to undergo drastic changes.
Although dominance is simple to calculate, it is not equally simple to interpret. However, it can be very effective, especially in combination with other data sets, to evaluate how to adapt to the market.
It should be noted that the increase or decrease in BTC dominance is not in itself positive or negative, rather, it provides traders with a perspective on the evolution of the sector.
Clearly, there are also those who question its reliability as a market indicator, given the complexity of the crypto ecosystem, with many factors that could influence market capitalization and, therefore, distort the metric.
It must certainly be said that, with the increase in the number of Altcoin present on the market, it is reasonable to expect that the dominance of BTC will continue to decrease, and that it will become increasingly difficult to assess whether and how much the dominance can be a useful indicator in the future as well.
Until next time,
Andrea Unger!