If you look around in the crypto space, you will always come across the term Bitcoin dominance. Bitcoin dominance describes Bitcoin’s share of the total market capitalization of the crypto market.
What does that mean?
The market capitalization of a cryptocurrency provides a guide as to how much money is invested in the respective crypto network. It is calculated by multiplying the number of tokens in circulation by the price of the respective cryptocurrency. For example, at the time of writing, 18,992,242 BTC are already in circulation. The price of Bitcoin is at 43,050 US dollars. This puts the market capitalization of bitcoin at approximately $818 billion at the time of writing. The remaining crypto networks (the so-called altcoins) together add up to 1.17 trillion US dollars. Total market capitalization (bitcoin and altcoins) is $1.99 trillion at press time. Because Bitcoin accounts for the majority of the total market capitalization, it is known as Bitcoin dominance. In the example, this is about 42.5 percent.
Bitcoin dominance: only of limited importance on its own
For obvious reasons, Bitcoin dominance is particularly interesting for traders trading BTC against Altcoins. But changes in the balance of power between Bitcoin and altcoins may also provide clues about the flow of capital in and out of the crypto market as a whole. Therefore, BTC-ECHO analyst Stefan Lübeck always pays close attention to Bitcoin dominance in the BTC price analysis every Wednesday. However, not in isolation, because:
You should always view BTC dominance in relation to BTC movement or trend direction. If BTC runs sideways and catches its breath in a general bull market, investors see no chance of a return there, so they jump into the residual market with alt/BTC pairs. Therefore, these phases of Alt/BTC movements are very bullish. As long as BTC swings sideways and the market does not wobble, Bitcoin’s dominance will decline disproportionately. However, the money is not leaving the market, which can be seen in an overall rising or lateral market capitalization.
Despite the overall positive development of the Bitcoin price, the dominance has been falling since the beginning of 2021, a sign of the strong growth of altcoins. Lubeck also:
As BTC starts to drop more significantly and a correction begins, Bitcoin dominance falls further in the short term and alt/BTC pairs blow up (relatively) as more satoshis become available, though it will rise due to the drop of the price of Bitcoin in dollars. less or stay the same depending on how much BTC slides.
Low BTC dominance announcing a correction
Due to the typical strong correlation between the price of Bitcoin and the altcoin market, the long-term trends of Bitcoin are also indirectly relevant to altcoins. Metrics like the exponential moving average (EMA) are often used to assess long-term trends. For example, the 200 EMA describes the average price of Bitcoin over the last 200 days. Unlike the simple moving average (SMA), the EMA gives more weight to recent data. The combination of the Bitcoin EMA 200, the dominance of Bitcoin and the total market capitalization can provide insights into trend changes in the crypto market. Then:
Once BTC breaks the key 200 EMA, as seen on May 19, 2021, investors are anticipating a possible broader market correction. That is, traders are going back to US dollars and BTC investors prefer to go back to BTC, which they know tends to correct less severely, and secure their profits. As a result, BTC’s dominance is increasing, while the total market capitalization is falling at the same time, because some people are going back to Fiat. For altcoins, this means a sharp drop. When altcoin prices crashed on May 21, 2021, dollar traders and BTC holders used these “buy prices” for altcoins for cheap new entries, altcoin prices rise and Bitcoin dominance returns fall.
Stefan Lübeck explains Bitcoin dominance interactions. In the meantime, he can find out how the price of BTC is doing after the most recent correction in the current analysis of Bitcoin.
This article was previously published in May 2021. It has been reviewed and updated accordingly before republishing.
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