Bitcoin is the first decentralized cryptocurrency, and remains one of the most reputable cryptocurrencies in the world.
Given its massive market cap, which often exceeds all of the largest altcoins combined, it is no exaggeration to say that #Bitcoin exerts a massive influence on the entire cryptocurrency market.
When discussing the market cap of Bitcoin and other cryptocurrencies, a common term that comes up is Bitcoin dominance. But what is this important metric and how is it used?
What is Bitcoin dominance, how does it work, and how can you use it to better understand market trends.
What is Bitcoin dominance?
Bitcoin dominance is the ratio of Bitcoin's market cap to the total market cap of the entire cryptocurrency market. It gives a sense of Bitcoin's value compared to other cryptocurrencies, and is often used by investors and traders to try to help them make better investment decisions.
Bitcoin price fluctuations affect the cryptocurrency market as a whole.
Historically, the overall market cap of cryptocurrencies has followed the market cap of Bitcoin. This is primarily due to Bitcoin’s position as the leading cryptocurrency in the cryptocurrency market.
Since Bitcoin often dictates the rest of the market, Bitcoin dominance becomes an essential metric to gauge its influence at any given time.
How to Calculate Bitcoin Dominance
You can arrive at the Bitcoin Dominance Index by simply dividing the market cap of Bitcoin by the total market cap of all other cryptocurrencies:
Bitcoin Dominance = Bitcoin Market Cap / Market Cap of All Other Cryptocurrencies
As an easy exercise, let’s assume that Bitcoin’s market cap is $5 trillion and the total cryptocurrency market cap is $10 trillion. In this case, using the formula (5 trillion / 10 trillion), Bitcoin’s dominance is 50%.
True Bitcoin Dominance
Some traders use a form of Bitcoin dominance called the True Bitcoin Dominance Index, which only takes into account coins that rely on the Proof-of-Work consensus mechanism.
The reason behind this approach is that the True Bitcoin Dominance Index is committed to tracking the movement of currencies that have the potential to be used as a decentralized medium of exchange in the future.
How to Calculate True Bitcoin Dominance
The True Bitcoin Dominance Index is calculated by dividing the market cap of Bitcoin by the market cap of Bitcoin and other proof-of-work cryptocurrencies:
True Bitcoin Dominance Index = Bitcoin Market Cap / (Bitcoin Market Cap + Other Proof-of-Work Cryptocurrencies Market Cap)
The point of distinction between true Bitcoin dominance and Bitcoin hegemony is that true Bitcoin dominance excludes ICOs and stablecoins, due to their connection to centralized intermediaries.
Throughout 2024, the real Bitcoin Dominance Index has fluctuated between 71% and 76%, down from its recent high of 85%, which occurred in December 2019.
Understanding Bitcoin’s market share can be a useful tool for assessing the overall health of the cryptocurrency market. Here are some ways to use this metric:
Considerations in Risk Management
Investors can use BTC dominance as one factor to help manage their overall risk exposure in the cryptocurrency market.
For example, if BTC is decreasing in value but Bitcoin’s dominance is increasing, this could be an indication of a potential bear market for altcoins. In this case, investors who are heavily invested in altcoins may consider selling some of their positions and moving to Bitcoin.
Investors may use BTC dominance as a barometer to help them gauge overall market sentiment and make decisions about how to diversify their cryptocurrency portfolio.
