What is BTC dominance?
BTC dominance calculates Bitcoin's current share of the global crypto market cap. Short for “market capitalization,” market cap refers to the value that's currently stored in an asset. Typically, people measure market cap in terms of fiat currencies like USD.
In cryptocurrency, people calculate a market cap by multiplying the number of available tokens by the token's current price.
For example, Bitcoin's price at the time of writing is $19,106.80, with 19.1 million coins in circulation. Here, you’ll multiply $19,106.80 by 19.1 million to get a market cap of $366 billion.
How is BTC market dominance calculated?
To determine BTC dominance, you need to know Bitcoin’s current market cap and the overall crypto market cap. Most reputable coin price aggregator sites like CoinGecko and CoinMarketCap show this data on their homepage. Once you have these numbers, divide the Bitcoin market cap by the global crypto market cap. This formula will reveal the percentage of cash in the crypto market that's stored in Bitcoin.
For example, Bitcoin’s market cap at the time of writing is $366 billion, and the global crypto market cap is $983 billion. After dividing $366 billion by $983 billion, you get 37%. This means that 37% of the global crypto market cap is now in Bitcoin.
What is "real" Bitcoin dominance?
"Real Bitcoin dominance" isn't as well-known as standard BTC dominance, but some investors believe it provides a more accurate percentage. In this model, investors only divide Bitcoin's market cap by the combined market cap of cryptocurrencies that use Bitcoin's proof-of-work (PoW) algorithm.
Supporters of the real BTC dominance percentage argue most of Bitcoin's competitors still use a PoW consensus mechanism. Coins like Litecoin, Dogecoin, and Bitcoin Cash all fall within the decentralized "peer-to-peer payment" niche. Therefore, it may help to compare Bitcoin's relative performance to these similar cryptocurrencies.
This effectively narrows Bitcoin’s competition to just these competitors, arguing proof-of-stake (PoS) tokens aren’t interested in becoming a global store of value and instead on other matters. For instance, many other altcoins are dedicated to fields like play-to-earn games, oracle protocols, or blockchain governance. Plus, a considerable percentage of altcoins are USD-pegged stablecoins.
While not everyone believes that real BTC dominance is "better" than traditional BTC dominance, it can give investors a different perspective on Bitcoin's market share.
What are the uses of BTC dominance?
Investors often use BTC dominance as one of many data points to get a broad overview of the cryptocurrency market. When BTC dominance first became popular during the 2017 bull run, traders were most interested in how altcoins like Ethereum were performing against BTC. Investors also noticed a correlation between BTC dominance and overall market conditions.
For example, at the start of the 2017 bull run, BTC dominance went from 63% in October to 37% in January 2018. This fall in dominance suggested that more people were pulling their gains out of Bitcoin and funneling them into ICOs (initial coin offerings) or speculative low-cap altcoins. However, as the bull market top started to pop, BTC dominance started climbing until it reached 71% in August 2019.
Generally, when market conditions are bearish, crypto investors tend to move out of riskier small- or mid-cap altcoins and reinvest in stablecoins or established large-cap projects like Bitcoin. While there's no exact science to using BTC dominance to examine bullish versus bearish conditions, some believe it may indicate a change in market sentiment.
Traders often compare the current BTC dominance with the influential Bitcoin "Fear and Greed" index. Alternative.me's "Fear and Greed" index weighs BTC dominance with daily price volatility and social media trends to determine how bullish or bearish crypto investors are. Scores closer to zero are incredibly fearful, while those near 100 are excessively greedy.
By combining all this data, investors can better understand the sentiment in the crypto market. After taking a BTC dominance chart into account, a crypto investor might spot an opportunity to buy or sell their bitcoin (or bitcoins) or altcoins.
For instance, some traders may create a comparative graph of Ethereum's crypto dominance and contrast it with BTC dominance. Whether ETH's market cap increases or decreases relative to BTC, it can potentially influence a trader's strategy.
Besides analyzing current market conditions, BTC dominance gives us a glimpse into the growth of the altcoin sector. Following the COVID-19 market crash of 2020, Bitcoin has struggled to break above 50% dominance. Even during the 2022 crypto bear market, Bitcoin dominance held within the 40% range. Some believe the steady decline of BTC dominance signals altcoins will gain a more significant share of the crypto economy.
Why does BTC dominance change?
The simple reason BTC dominance changes is that Bitcoin's market cap rises or drops relative to altcoins. However, here are other features that may influence the BTC dominance percentage:
- Increase in altcoin projects: As the number of altcoins, stablecoins, and NFT (non-fungible token) collections continues to increase, Bitcoin's share of the total crypto market will inevitably decrease. BTC may remain the most valuable and liquid digital asset, but more altcoins will dilute its dominance score.
- Risk appetite: During bull runs, crypto traders tend to cycle out of established cryptocurrencies like Bitcoin and put their money to work in riskier small-cap tokens. Conversely, crypto investors may put their money back into large projects like Bitcoin during a bear market.
- Stablecoin market cap: Investors often perceive Bitcoin to be the "safest" cryptocurrency due to its longevity. However, now that stablecoins have become more widely accessible, they’ve become a more attractive option for investors who want a "secure" cryptocurrency. The more people buy stablecoins over BTC during bear markets, the lower BTC dominance will go.
How reliable is BTC dominance?
While BTC dominance has become a common tool in crypto investing, here are a few critiques surrounding its reliability. A few factors might skew the accuracy of the official BTC dominance score.
- It doesn't focus on competing cryptocurrencies: Not every altcoin is competing with Bitcoin. In fact, many altcoins want to collaborate with Bitcoin to strengthen their respective ecosystems. BTC dominance doesn't consider the differing goals of various altcoins versus BTC.
- It doesn’t offer stablecoin growth: Sometimes, it may look as if BTC dominance is going down when more people are transferring their fiat into USD-pegged stablecoins. Although stablecoins are technically "altcoins," there's no expectation these tokens will change in value. To examine BTC's relationship with speculative altcoins, calculate BTC dominance without stablecoins.
- It can't account for scam projects or micro-cap coins: Whenever a new coin gets listed on the crypto market, it affects the total crypto market cap. Even if these small projects are Ponzi schemes, rugpulls, or have zero chance of long-term success, they will impact Bitcoin's dominance percentage.
- It doesn't count lost bitcoins: It's unknown how many bitcoins are stuck in irretrievable wallet addresses. We also don't know how many future bitcoins could get accidentally burned. However, current estimates suggest at least 20% of BTC's supply is inaccessible. If this is the case, it’ll change BTC's market cap, which would alter current BTC dominance scores.
Wrapping up
If altcoins, stablecoins, and NFTs continue to saturate the crypto market, it's difficult to say how helpful BTC dominance will be. Critics argue the altcoin market is already too large to gain any valuable data from a BTC dominance chart. Additionally, some argue BTC dominance gives a false impression that Bitcoin is in "competition" with every altcoin. Bitcoin has a distinct purpose as a store of value and a peer-to-peer payment system. Besides coins like Litecoin and Bitcoin Cash, a few altcoins are directly challenging Bitcoin's core use cases.
However, if BTC remains the top-performing cryptocurrency, it’ll probably hold great sway over the entire industry. Therefore, BTC dominance will likely remain relevant for many crypto traders.
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