There are 21,894 cryptocurrencies in circulation as of December 2022. But nothing can come close to Bitcoin (BTC) and its impact on the larger market.
On January 3rd, 2009, the Bitcoin network came into existence. It’s been close to 14 years since its origin, yet BTC remains the most prominent digital asset by market cap.
The influence of BTC over the crypto market can be measured using an index called the ‘Bitcoin Dominance.’ Investors and traders use it to gain insights into market sentiments and trends to make better investment decisions.
Sounds exciting? Then buckle up and keep reading.
In this article, we will explore some questions, like what is Bitcoin Dominance? How does it work? How can I use it while investing?
Definition of Bitcoin Dominance or BTC Dominance
Bitcoin or BTC Dominance is the ratio of Bitcoin’s market cap to the total crypto market cap.
The formula goes like this:
Bitcoin Dominance = Market cap of BTC / Total crypto market cap
As of December 2022, the BTC market cap is $329.23 billion, and the total market cap of cryptocurrency is $861.45 billion. Then the BTC dominance is 329.23/861.45 = 38.22%.
Back in early 2017, BTC dominance was more than 90%. It all changed between 2017 and 2018 when there was an ICO boom. ICO stands for Initial Coin Offering and is a popular crowdfunding method. It involves selling crypto tokens to finance the development and launch of crypto projects. The ICO boom led to the emergence of many altcoins. Altcoins are cryptocurrencies other than Bitcoin.
The BTC dominance index gives an understanding of BTC’s value compared to other cryptos in the market. Also, it showcases the movement of altcoins relative to Bitcoin. For instance, if the BTC dominance index decreases despite a stable BTC price, it indicates that altcoins are experiencing an uptrend.
There is another variation of BTC dominance called the ‘Real Bitcoin Dominance Index.’ This index only considers crypto projects satisfying the following two conditions.
1. Consensus mechanism
Projects must use the Proof of Work (PoW) consensus mechanism. It’s because Bitcoin uses PoW to reach consensus among its miners.
2. Use case
Crypto coins should focus on solving issues related to the traditional financial industry. It’s because the original goal of Bitcoin is to replace fiat currency and improve the centralized banking sector.
Thus, to have an apple-to-apple comparison, the real BTC dominance index includes only PoW-based projects that aim to improve the existing fiat system. These include the following list.
- Bitcoin (BTC)
- Litecoin (LTC)
- Bsv (BSV)
- Bcash (BCH)
- Monero (XMR)
- DASH (DASH)
- Zcash (ZEC)
- Bitcoin Gold (BTG)
- Ethereum Classic (ETC)
- Dogecoin (DOGE)
- Decred (DCR)
The calculation goes like this:
Real Bitcoin Dominance Index = Market cap of BTC / Total market cap of cryptocurrencies on the above list
What Is the Relation Between Market Cap and BTC Dominance?
Market capitalization or market cap refers to the total value of the cryptos.
Market Capitalization = Total number of coins in circulation x Price of a coin
The BTC dominance index utilizes market cap as its primary element for calculation purposes.
The market cap showcases the popularity of an asset among investors. Higher the market cap, the stabler the crypto price. Cryptos can be divided into three types based on their market cap.
1. Large-cap cryptocurrencies
Cryptos with a market cap of more than $10 billion fall under the large-cap category. Large-cap cryptos have an excellent track record and are less risky. They are safer bets from an investment perspective. Examples of large-cap cryptos are Bitcoin (BTC), Ethereum (ETH), BNB (BNB), etc.
Want to explore large-cap cryptos? Check out the Blue chip Crypto Coin Set from Mudrex. It contains the top cryptos by market cap, including BTC and ETH. The Coin Set is designed in a way for investors to get the maximum returns by taking the optimum level of risk.
2. Mid-cap cryptocurrencies
Mid-cap cryptos have a total capitalization between $1 billion to $10 billion. They are riskier than large-cap cryptos but have excellent growth potential. Examples of mid-cap cryptos are Polygon (MATIC), Polkadot (DOT), Uniswap (UNI), etc.
3. Small-cap cryptocurrencies
Cryptos with less than $1 billion in market cap are small-cap cryptos. These are highly volatile assets, so thorough research is required before investing in them. Examples of small-cap cryptos are Zcash (ZEC), Dash (DASH), Neo (NEO), etc.
Factors Influencing BTC Dominance
1. Rise of new projects
As mentioned, BTC dominance peaked at over 90% before the ICO boom. It was due to the lack of significant competition. But, after the rise of projects like Ethereum, BNB, Ripple, etc., the index fell to an all-time low of 33.82% on Jan 2018. It signifies the growing popularity of altcoins among investors.
2. Stablecoins
Stablecoins are cryptos whose value is pegged to stable assets like USD or EUR. Tether (USDT) is the largest stablecoin with a market cap of $65 billion. It is pegged to the U.S. dollar.
Typically, risk-averse investors prefer stablecoin over Bitcoin in their investment portfolio. But even risk-takers are investing in stablecoins due to the ongoing crypto winter, diluting the BTC market cap.
3. Bull or bear run
Investors get greedy during bull markets. Thus, they invest more in altcoins in the hope of significant returns. This negatively impacts the BTC dominance index.
In contrast, investors become fearful and seek to mitigate risk during bear runs. Hence they would dump altcoins, thereby increasing the index value.
Where Does Bitcoin Dominance Help?
Below are a few ways to make use of the index.
1. Identify trading signals
Bitcoin dominance ratio helps to identify potential buying opportunities in the crypto market.
The table summarizes the signals one can use while trading.
| BTC Dominance Index | Bitcoin Price | Signal |
| Uptrend | Uptrend | Buy Bitcoin |
| Uptrend | Downtrend | Sell altcoins |
| Downtrend | Uptrend | Buy altcoins |
| Downtrend | Downtrend | Sell Bitcoin |
For example, when the BTC dominance index and the Bitcoin price are rising together, it indicates that there is high demand for Bitcoin compared to altcoins in the crypto market. Hence, it could lead to a potential Bitcoin bull run.
2. Identify trend reversals
Another strategy involves trading in the crypto market when the BTC dominance index reaches extreme highs and lows. It evaluates whether the existing trend will remain intact or will experience reversals.
The below table acts as a guideline to identify trend reversals.
| BTC Dominance Index | Bitcoin Price | Signal |
| Highest High | Uptrend | Sell Bitcoin |
| Highest High | Downtrend | Buy altcoins |
| Lowest Low | Uptrend | Sell altcoins |
| Lowest Low | Downtrend | Buy Bitcoin |
For example, suppose the index is at its historic high, and the BTC price increases. There is a high scope for trend reversal as the likelihood of breaking the historic high reduces. Thus, it could be the right time to sell Bitcoin.
3. Portfolio diversification and risk management
BTC dominance is beneficial not only for traders but also for investors.
Investors can use the index to identify the prevailing market sentiments. They can diversify their portfolio based on the existing trends and manage their risk exposure.
For example, suppose the index is on a downtrend, and the BTC price is on an uptrend. It means that altcoins’ prices are increasing at a rapid rate than BTC, signaling a potential bull run for altcoins. If altcoins are not part of your investment portfolio, you can consider buying some top altcoins to take advantage of the bull run.
Conclusion
Bitcoin dominance is a well-known metric, especially among Bitcoin enthusiasts. It’s an excellent tool for managing one’s trading style or investment portfolio.
However, it doesn’t mean the index is not without any limits. Some believe that the Bitcoin dominance index will lose its relevance in the future due to the emergence of new coins and use cases.
FAQs
1. Is BTC dominance a good indicator to trust before trading or investing?
Yes. BTC dominance index acts as a good indicator to identify potential trends and market cycles. But crypto markets are too complex to rely only on a single indicator.
Thus, apart from the BTC dominance index, the below tools can come in handy while researching.
2. What causes a drop in BTC dominance?
Below is the list of three possible scenarios leading to a drop in BTC dominance.
- Increase in BTC price and pumping of altcoin price
- Decrease in BTC price and stable altcoin price
- Stable BTC price and increase in altcoin price
3. Which coin has the highest market dominance?
Bitcoin (BTC) currently has the highest market dominance, followed by Ethereum (ETH) and Tether (USDT). The %market cap of BTC is 38.22% as of December 2022. It is calculated by dividing Bitcoin’s market cap by the total crypto market cap.
