In the world of cryptocurrencies, there's one metric that many crypto traders keep a close eye on: Bitcoin dominance. CoinMarketCap has been tracking it for years — and it takes pride of place at the top of our homepage.
But what is the significance of Bitcoin's dominance? Can it tell us anything about the performance of altcoins? And what about those who argue that this metric doesn't give an accurate reflection of the crypto market? Here, we'll explain how BTC dominance works.
Bitcoin Dominance: A Brief Definition
Calculating BTC dominance is straightforward.
Let's imagine that the total market cap of all cryptocurrencies currently stands at $100 billion. If Bitcoin's market cap represented $60 billion of this, Bitcoin's dominance would stand at 60%. See? It couldn't be easier.
BTC Dominance Over the Years
As you'd expect, Bitcoin had few challengers in 2013. Back then, it had a market dominance of 94%. ERC-20 tokens didn't exist back then, Ethereum was just a figment of Vitalik Buterin's imagination and stablecoins such as Tether (USDT) weren't a thing either.
All of this started to change in 2017, when the first altcoin season began. In February of that year, BTC dominance stood at 85.4% (ETH had a 5.7% share of the cryptocurrency market cap, while Ripple's XRP was on 1.1%.)
But in the course of four short months, Bitcoin's market share plunged dramatically as a spate of initial coin offerings (ICOs) boosted the industry's market capitalization substantially. By June, BTC dominance had fallen to just 40% — with liquidity moving to ERC-20 tokens instead. CoinMarketCap data shows that, over the same period, total market capitalization in USD soared from $20 billion to $114 billion — a 470% increase.
During this period, Ethereum enthusiasts began to speak about the so-called "Flippening," when Ethereum's market cap would "flip" higher than Bitcoin's — which never ended up happening.
Bitcoin prices crashed after the first bull run in 2017, and by January 2018, Bitcoin's dominance was resting at an all-time low of 32.8% as a bear market commenced. Unfortunately, the alt season was officially over too, with many first-time investors losing substantial amounts of money as ICO projects crashed and burned.
Ernst & Young tracked data from ICOs that launched in 2017, and assessed them a year later. It found:
- 86% of ICOs had fallen below their listing price;
- 30% of these altcoins had lost substantially all their value;
- Just 29% of ICOs actually had a prototype or a working product.
These sobering statistics made countries such as the United States take a dim view of ICOs, and regulators there have launched lawsuits against several blockchain projects that completed a token sale. Government bodies also warned investors to expect volatility in digital assets — issuing investment advice that was tantamount to saying people should stick to the stock market.
After the bullish bubble burst, Bitcoin dominance returned to some extent — hitting highs of 70% in September 2019. However, it's unlikely that we'll see BTC punch through this level ever again.
The world of cryptoassets is now more rich and diverse than it was in the early 2010s. There have been various Bitcoin hard forks, including Bitcoin Cash (BCH). New crypto market trends such as DeFi have shifted liquidity to Ethereum, and now ICO hype has died down, we've started to see some digital assets with compelling use cases develop a loyal following.
The Downsides of Bitcoin Dominance
We end with a disclaimer: some analysts recommend taking Bitcoin dominance with a pinch of salt.
Some argue this metric doesn't take into account the BTC that has been lost forever, either through hacks or people absentmindedly losing their private keys. Others warn it fails to factor in Bitcoin's deep liquidity. An altcoin might have a valuation of $2 billion, eating into BTC dominance, but this could be artificially inflated.
Nonetheless, BTC dominance can help give you a gentle steer on how much of your capital you should allocate to altcoins. It's just important that you don't put all your eggs in one basket, and rely on other forms of analysis as well.