Bitcoin dominance is a metric used by traders to measure the demand between bitcoin and the rest of the cryptocurrency market. Here’s what you need to know.
- Bitcoin dominance is a metric which symbolises bitcoin’s share of the overall cryptocurrency market.
- The Bitcoin Dominance Index is used to assume trader sentiment.
- Low levels of bitcoin dominance can indicate heightened interest in other cryptocurrencies
The bitcoin dominance index (BDI) is a tool used to ascertain bitcoin demand in relation to the rest of the cryptocurrency market. As the pioneering cryptocurrency, bitcoin claims the highest trading volumes, and thus also maintains the largest market capitalisation of the entire digital asset economy. As such, the index can be viewed as an indicator of bitcoin’s influence and impact on the rest of the market.
Traders typically use the BDI to gather an understanding of the sentiment and potential direction of the market. More concretely, the dominance index decerns the overall balance of demand between bitcoin and the rest of the crypto market. As of writing, bitcoin dominance stands at approximately 65% of the entire crypto market capitalisation with the remaining 35% allocated by various altcoins.
The index can also conceivably be used as a measure of the cryptocurrency market’s aversion to risk, with an uptick in bitcoin dominance indicating that investors are swapping out altcoins for bitcoin in, for example, a flight to safety amid macro risk.
It should be noted, however, that bitcoin dominance isn’t an exact science. The BDI doesn’t take liquidity into account; instead, it factors dominance on market cap only. This can skew the BDI as a portion of some cryptocurrencies remain inaccessible or illiquid either due to forgotten digital wallets, lost coins or defunct projects but still number among the market cap calculation.
A history of dominance
There was a time, in the early stages of the cryptocurrency market, where a dominance indicator was unnecessary, simply because bitcoin was the only cryptocurrency of note in existence. However, as more cryptocurrencies have emerged over the years—particularly in the wake of the Initial Coin Offering (ICO) boom of 2017—it became beneficial for traders to track the ratio of demand between altcoins and bitcoin.
The ICO boom served as one of the greatest challenges to bitcoin’s market dominance. As investors started to pile into these novel offerings, ethereum—being the funding vehicle of choice—started to gain traction. By June 2017, bitcoin dominance had slipped from a yearly high of 87% recorded in January to a low of 37.84%. Taking up the slack, Ethereum’s dominance had risen to meet bitcoin’s, rising from a yearly low of 3.9% in January to an all-time high of 31.17%.
This shift in dominance marked one of the first instances of what’s colloquially known as “altseason”—a period in which market sentiment shifts toward altcoins, resulting in significant gains across the altcoin market.
The best example of altseason occurred following bitcoin’s parabolic run-up to $20,000. As traders started shifting profits accrued from the rally into the alt market, valuations peaked with some cryptocurrencies citing gains upward of 300%. In fact, all-time highs achieved by Ethereum, XRP, and almost every other altcoin were established during that rally.
All considered, the BDI can provide a useful measure of insight into the overall balance of sentiment between bitcoin and the altcoin market—helping traders identify opportunities to diversify.
However, the index isn’t without its flaws.
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