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Dimensions 101: Bitcoin Dominance, Altcoin Season, and Crypto Investments

Dimensions 101: Bitcoin Dominance, Altcoin Season, and Crypto Investments

Crypto Technical Analysis

28 Apr 2020

Despite the fact that thousands of altcoins exist today, no other cryptocurrency has managed to take over BTC's place as the top dog.

Since its birth, Bitcoin has been dominating the crypto space, literally in every retail investing app.

Despite the fact that thousands of altcoins exist today, no other cryptocurrency has managed to take over BTC's place as the top dog.

And this doesn't come as a surprise.

Bitcoin, as the world's original cryptocurrency, boasts a good reputation, a large community, as well as regular media attention.

But what does BTC dominance mean for crypto investors?

Bitcoin Dominance - Key takeaways

  • Bitcoin dominance indicates BTC's share of the total crypto market cap.
  • While Bitcoin managed to hold its position as the leading cryptocurrency by market cap, the BTC dominance index has experienced major changes throughout the asset's history.
  • When the Bitcoin dominance index is at high levels, it could indicate that investors are preferring lower-risk digital assets and/or that there is a growing interest in crypto in general.
  • Low BTC dominance could suggest that an altcoin season is imminent where the demand for alternative cryptocurrencies is higher.
  • The Bitcoin dominance index is a useful tool for crypto investors, but the methods to calculate it includes some flaws.

What Is Bitcoin Dominance?

Shown as a ratio, Bitcoin dominance is a metric that shows BTC's share of the total crypto market capitalization.

At the time of writing this article, BTC's dominance stands at 63.65%.

Ethereum (ETH), the second-largest cryptocurrency by market cap, has a total share of the digital asset market of 9.67%. ETH is followed by Ripple (XRP) and Tether (USDT), with 4.06% and 3.10%, respectively. The remaining coins take up only 20% of the total market cap.

When Bitcoin dominance is high, it shows that demand for BTC is bigger than the market average. In the opposite case, when the average demand for altcoins exceeds that of Bitcoin, BTC dominance will decrease.

High Bitcoin dominance could indicate that crypto investors are leaning towards safer investments in the form of BTC rather than taking up riskier positions in digital assets with smaller market caps and less liquidity.

There's a consensus within the cryptocurrency community that Bitcoin is a "gateway coin" for a great share of new digital asset investors.

This makes sense since BTC has a great reputation as a long-standing cryptocurrency, boasting high-profile media coverage, the lowest volatility among non-stablecoin digital assets, as well as a near-universal listing on crypto exchanges.

Therefore, increasing BTC dominance could also suggest a growing interest in the digital asset industry.

On the other hand, a declining Bitcoin dominance index could mean that there's a trend among investors to sell their BTC and consider riskier digital assets for greater returns.

BTC Dominance Throughout the Cryptocurrency's History

While Bitcoin has remained the largest cryptocurrency by market capitalization, this doesn't mean that it’s always been so to the same extent.

BTC had the highest dominance when there were only a handful of cryptocurrencies present within the industry.

Source: CoinMarketCap

According to CoinMarketCap's index, in May 2013 – when there were only ten digital assets present on the cryptocurrency market –, BTC dominance hit one of its highest rates (94%), very close to its all-time high (96.5%) in November 2013.

Bitcoin managed to maintain its dominance at over 90% until November 2014 when XRP's market capitalization surged by over 13% – as the result of a major bull run – where the coin increased its value by 410% in less than two months.

This event lowered the BTC dominance to 78%. However, shortly after, the cryptocurrency recovered its lost market cap and moved between 85% and 90% until January 2016.

That was the point when Ethereum started to become popular and carved out a market share of over 13%, decreasing Bitcoin's to 76.42%.

Bitcoin was able to recover its dominance to 86% in February 2017, which marked the start of the first major altcoin season.

As a direct result of the event, Bitcoin almost lost its leading position to Ethereum in June 2017, with the BTC and ETH market cap taking up 37.84% and 31.17%, respectively.

Interestingly, the Bitcoin Cash hard fork in August 2017 – which resulted in a major split of the BTC community –, didn't have a significant negative impact on the Bitcoin dominance index.

After falling roughly 5%, BTC increased its dominance over the crypto market to 62.80% in December 2017.

However, in January 2018 – right before the start of the "Crypto Winter" –, Bitcoin dominance reached its all-time low at 32.81%.

Since then, except for some minor drops, Bitcoin's dominance has entered into an uptrend, gradually growing the cryptocurrency's market share to today's 63.65%.

Bitcoin Dominance's Relations With Altcoin Seasons and Market Crashes

The Bitcoin dominance index is one of the most important indicators for altcoin investments.

When BTC's market share is at very high levels, it could mean that other coins are struggling to keep pace with the cryptocurrency.

On the other hand, when Bitcoin dominance decreases significantly, it could signal the start of an "altcoin season" – a period in which alternative crypto assets gain market share relative to BTC.

Let's see what happened to the Bitcoin dominance index during the altcoin season of early 2017.

In February, Bitcoin's price started to show a bullish trend, increasing the cryptocurrency's value from $980 to $1,180, representing a 20% surge by the end of the month.

As crypto investors saw some gains in their BTC investments, they started looking for altcoins to make more potential profits.

As a result, the Bitcoin dominance index started to fall rapidly from March onwards, losing 48% of its market share to other cryptocurrencies amid the rise of Initial Coin Offerings (ICOs) that allowed crypto projects to raise record amounts of funds in 2017.

While altcoins continued to thrive, Bitcoin entered into a major bull run between mid-June and early December, increasing its value substantially from $2,590 to $20,000.

During this period, the BTC dominance index managed to climb back from 38% to 62.80%.

However, after reaching its all-time high in December, Bitcoin's price entered into a minor downtrend until January 8 – from $20,000 to $16,000 – before finally plunging further down.

Despite Bitcoin's minor price drop between early December and early January 2018, altcoin prices continued to surge during this period – especially XRP – which lowered the BTC dominance index from 62.80% to 33.89%.

Source: Coin360

But when Bitcoin's price proceeded to make the strong descent from early January – signaling the start of 2018's long-lasting bear market –, altcoins followed BTC's downward price movements, but even more heavily.

While BTC experienced a value decrease of 55% between early January and early April, Ethereum (ETH), Bitcoin Cash (BCH), and Ripple (XRP) dropped by 66%, 74%, and 80%, respectively.

As altcoins were bleeding heavily, Bitcoin's dominance started to increase significantly, allowing the coin to recover its losses during the bear market.

When Can We Expect Bitcoin Dominance to Increase or Decrease?

Now let's see what we have learned from the last section's analysis.

First, shortly after Bitcoin's price starts an uptrend, an altcoin season could commence. And, as a result, BTC dominance will start to fall rapidly as investors are looking more into alternative coin investments.

When Bitcoin's dominance is at very low levels, the cryptocurrency could eventually enter into a major bull run, in which it could take a part of its share back from altcoins.

However, as market crashes tend to hit Bitcoin less significantly than altcoins, BTC's dominance will start to grow in the aftermath of major price falls as well as during bear markets.

The usual levels of the Bitcoin dominance index have been around 60-80%. Therefore, if you see that BTC's market share falls below 60%, it could signal that an altcoin season is coming where alternative cryptocurrencies will experience rising demand for shorter periods.

On the other hand, during an altcoin season, if BTC dominance falls below 40%, it would indicate that Bitcoin is ready to reclaim its market share form other cryptocurrencies.

Of course, Bitcoin is still a young asset and more time will be needed to understand exactly how BTC dominance plays in other events in the market, and vince versa.

Warnings About the Bitcoin Dominance Index

The Bitcoin dominance index is a decent indicator that could help investors in gathering insights into potential altcoin seasons and investments.

However, you should be aware that the Bitcoin dominance index contains some flaws, which have been often criticized by a part of the crypto community.

The dominance index's problems start with market capitalization, a measure that is often used in the general market.

By multiplying the price of a company's shares with the total stock issuance, we can reliably and accurately analyze the market cap of an organization that is traded on exchanges.

While this measure has been implemented to cryptocurrencies as well, the method to calculate a coin's market capitalization is different – and not as precise – as with general market assets.

For crypto, the market capitalization calculation goes by as: the price of a digital asset multiplied by the total number of coins in circulation.

The first caveat of this market cap calculation model is that we don't precisely know how many coins are in existence for a digital currency as many users' wallet credentials have been lost or stolen, taking those assets permanently off the market.

Also, this method doesn't take liquidity into account. And it would be important to consider this factor as many altcoins are rather illiquid, with some even failing to trade on prominent exchanges.

While these cryptocurrencies are still counted in the market capitalization of altcoins, they can hardly be traded, especially when compared to Bitcoin (one of the most liquid digital assets).

Despite the flaws of the index, Bitcoin dominance serves as a decent indicator for crypto investors to anticipate altcoin seasons and BTC-dominant periods to decide how to manage their portfolio.

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