In the early days of cryptocurrency, there was only Bitcoin, and Bitcoin dominated the market almost without any real competition. This overwhelming dominance is what we now call “Bitcoin dominance” – a measure of Bitcoin’s strength compared to all other cryptocurrencies combined.
Bitcoin dominance is the ratio of Bitcoin’s market cap to the total market cap of all cryptocurrencies. This metric can be used as a way to understand how much Bitcoin continues to dominate the cryptocurrency world.
As the cryptocurrency market expands, Ethereum has started to compete with Bitcoin, followed by many other currencies with revolutionary solutions. It has become essential for analysts and economists to understand how to read this metric to know how it affects the movement of cryptocurrencies.
Understanding Bitcoin Dominance for Traders
Bitcoin dominance is an important indicator that provides valuable insights into the cryptocurrency market. Here are the main reasons why it is important:
1. Market Sentiment Indicator
High dominance reflects a safe-haven bias and bearish outlook, while low dominance indicates risk appetite and a preference for altcoins. In 2022, when most cryptocurrencies fell in price, traders turned to Bitcoin as a safe haven due to economic concerns.
2. Portfolio Strategy Guidance
Bitcoin dominance helps determine the balance between Bitcoin and altcoins. High dominance may prompt a focus on Bitcoin, while low dominance suggests a need to diversify towards altcoins. In 2021, Bitcoin dominance rose significantly in a short period, prompting many traders to shift a large portion of their investments to Bitcoin, expecting it to be more stable amid market volatility.
3. Identify market stages
In bull markets, dominance often declines as altcoins rise. In bear markets, dominance increases as Bitcoin stabilizes relatively. In the summer of 2020, with the emergence of a new wave of successful DeFi projects, Bitcoin dominance declined significantly, indicating that the market had entered a bullish phase in which altcoins were making greater gains.
4. Uncovering opportunities and stability
Declining dominance may signal opportunities in altcoins. High dominance is often associated with greater market stability. At the beginning of 2023, with Bitcoin’s dominance rising, the market enjoyed a period of relative stability, but its decline in the middle of the year signaled the emergence of investment opportunities in some altcoins that had seen significant gains.
5. Predictive power
Changes in Bitcoin dominance can precede significant market shifts, helping traders prepare for them. In 2018, Bitcoin dominance began to gradually increase before the major cryptocurrency market crash at the end of the year, giving traders advance warning that the market was headed for a bearish period.
Ultimately, understanding Bitcoin dominance contributes to making better trading decisions, managing risk more effectively, and identifying potential opportunities in the ever-changing cryptocurrency market.
