Bitcoin has always been the dominant cryptocurrency. It’s the most commonly traded digital asset, and is the most popular with institutional investors too. Indeed, the only cryptocurrency futures available for trading on US government-regulated exchanges are Bitcoin futures. Dozens of online brokers have provided ways for consumers to get their feet wet with bitcoin trading too.
But other cryptocurrencies are widely available and represent a substantial part of the market. The rise and fall of Bitcoin dominance can tell us a lot about the cryptocurrency market.
Bitcoin is still the largest cryptocurrency in the world as defined by market capitalization. Bitcoin dominance is the ratio between Bitcoin market capitalization compared to all of the other cryptocurrencies.
The dominance of Bitcoin at the end of November 2020 stands at around 64%. The second most popular cryptocurrency, Ethereum (Ether), is at 12%.
In 2013, there were far fewer cryptocurrencies, and Bitcoin was utterly dominant with 94%. In June 2017, Bitcoin dominance fell to 38%. This was not due to a decrease in value but rather an increase in value of other cryptocurrencies. It then rose back up to 62% by December 2017. For the past year, Bitcoin dominance has been fairly stable, holding around 64%.
Looking back, there has been a lot written about the rapid movements of 2017 as possibly some kind of manipulation. Either way, it shows just how volatile the price and dominance movement of Bitcoin has been.
In addition to Ethereum (ETH), the other most popular cryptocurrencies that compete with Bitcoin (BTC) include:
The 2017 bullish move of Bitcoin created the myth that Bitcoin dominance goes down during cryptocurrency rallies. This is when the term “altcoin season” became popular, to reflect the apparent rally that should happen when Bitcoin’s dominance drops.
Altcoin season describes a time frame when cryptocurrencies other than Bitcoin perform better than Bitcoin does. When new initial coin offerings (ICOs) occur, this can increase the market capitalization of other cryptocurrencies and at the same time, lower the dominance of Bitcoin.
Also, there are several factors that can affect the dominance of Bitcoin. With all this in mind, it is not correct to infer that there is a direct relationship between dominance and Bitcoin bull or bear market trends. And traders should not compare today’s approximately 64% dominance rate side-by-side with previous years.
A couple of factors that can affect Bitcoin dominance are:
It does not take into account so-called zombie Bitcoins or Bitcoins that have been lost forever. There are approximately 4 million lost Bitcoins.
Dominance is not exactly like a company’s market cap, which is a value based on outstanding stock times share price. A crypto’s dominance is the price of a digital asset multiplied by the total number of coins in circulation.
For example, some new and rather useless cryptocurrency token comes out with a circulation of 2.5 billion. It is manipulated to trade at $1, which brings its market capitalization to $2.5 billion with a market share of 1%. This could take this coin or token right up to one of the top 20 cryptocurrencies in the market, despite it being unusable. This is what can cause Bitcoin dominance to fall and disrupt the entire cryptocurrency ecosystem.
Some analysts believe that the new decentralized finance (DeFi) token movement is one of the main factors behind shifting Bitcoin dominance.
For most of the past decade, Bitcoin dominance has been above 50% and is currently holding around 64%. When Bitcoin dominance falls, it means that the demand for other cryptocurrencies increases. A falling Bitcoin dominance means that the relative demand for Bitcoin is decreasing.
When Bitcoin dominance rises, it means that crypto investors are looking for safer or less volatile cryptocurrencies. This is mainly because there is better liquidity in Bitcoins than other cryptocurrencies.
When Bitcoins dominance falls, this is called the beginning of alt season and is a good sign for altcoins. For investors, this can occur after a run-up in Bitcoin prices and traders are selling Bitcoin to take the profits and buying altcoins.
Since altcoins have less liquidity and higher volatility, altcoins can rise considerably at this time.
As of December 6, 2020, Bitcoin is at $19,364, close to its all-time high of $19,783 last reached in December 2017. So far in 2020, Bitcoin is up 154% year-to-date. Bitcoin dominance has ranged from 57% to 66% during the current price increase.
Some analysts point to several events that have caused this price increase. One fact is that PayPal announced it will allow users to buy, sell, and hold Bitcoin.
Another factor could be that president-elect Joe Biden has appointed Gary Gensler to lead the agency review team for the Federal Reserve, banking, and securities regulators. Mr. Gensler is crypto-friendly. Bitcoin has also benefited from the weak dollar, which is expected to stay weak for the foreseeable future.
This is also a time to watch the price and tread carefully. If or when Bitcoin passes the $20,000 level, will long-term holders (called “hodlers”) start to sell and take some profits?
There are currently some bold predictions that Bitcoin can surpass its all-time high and go as high as $300,000. But remember: many similar predictions were made in 2018, right before it plunged in price.
Watching Bitcoin dominance could give insight towards price reversals. If there is rejection at the 64% dominance level, it could flip the momentum to altcoins.
Ben is a cryptocoin enthusiast who began by investing and mining Litecoin in 2013. Since that time, he has evaluated hundreds of alternate coins and tokens in a never ending search for the next big thing to grow his portfolio. He has been involved with ICOs, providing guidance and assistance. Ben is a firm believer in searching for fundamental value and actual utility in cryptocoins. He sees blockchain (or a public ledger system) becoming more prevalent in society and expanding its use beyond that of an electronic cash system.
