Nevertheless, Bitcoin remains the king, and its dominance in the market is measured by a metric known as "Bitcoin Dominance."
What is Bitcoin Dominance?
BTC Dominance refers to the percentage of the total cryptocurrency market capitalization that is represented by Bitcoin. In other words, it is a measure of how much of the total cryptocurrency market is made up of Bitcoin. It is calculated by dividing the market capitalization of Bitcoin by the total market capitalization of all cryptocurrencies.
For example, if the total cryptocurrency market capitalization is $1 trillion, and Bitcoin's market capitalization is $600 billion, then Bitcoin Dominance would be 60% (i.e., 600/1000). This means that Bitcoin represents 60% of the total cryptocurrency market, while all other cryptocurrencies combined represent the remaining 40%.
Bitcoin Dominance As an Important Metric
Bitcoin Dominance is an important metric for several reasons. Firstly, it provides a snapshot of the cryptocurrency market's health and how it is evolving over time. For example, if Bitcoin Dominance is increasing, it could indicate that investors are becoming more risk-averse and are consolidating their investments into a safer asset like Bitcoin. Conversely, if Bitcoin Dominance is decreasing, it could mean that investors are becoming more adventurous and are exploring other cryptocurrencies that have more potential for growth.
Secondly, Bitcoin Dominance can be a useful tool for traders and investors. For example, if an investor believes that Bitcoin will continue to dominate the market, they may choose to invest primarily in Bitcoin rather than other cryptocurrencies. Conversely, if an investor believes that other cryptocurrencies are likely to gain ground on Bitcoin, they may choose to diversify their portfolio and invest in a range of different cryptocurrencies.
Finally, Bitcoin Dominance can also be used as an indicator of market sentiment. For example, if Bitcoin Dominance is high, it could mean that investors are feeling bullish about the overall market, while if Bitcoin Dominance is low, it could indicate that investors are feeling bearish.
Factors Affecting Bitcoin Dominance
Bitcoin's dominance in the market can be affected by various events, including:
- Altcoin features:
Many altcoins launched before 2015 had limited functionalities, focusing only on improving certain aspects of Bitcoin. However, the introduction of Ethereum and smart contracts revolutionized the possibilities of blockchain technology. Nowadays, crypto tokens with diverse applications, from DeFi to gaming and art, have emerged, resulting in a decrease in BTC dominance.
Stablecoins are crypto tokens designed to eliminate price fluctuations, thereby facilitating easier transactions. As more individuals use stablecoins for trading and transactions, the crypto market gains value without any impact on Bitcoin's price. This could lead to a reduction in BTC dominance.
- Market cycles:
The fluctuation between bear and bull markets can also affect Bitcoin's dominance. As Bitcoin is deemed a relatively safe asset, during a bear market, its dominance is likely to increase. However, in a bull market, investors might opt for riskier alternatives, resulting in a reduction in BTC dominance.
How Reliable is BTC Dominance?
While BTC dominance has become a popular tool in cryptocurrency investing, several critiques have been raised regarding its reliability. There are a few factors that could skew the accuracy of the official BTC dominance score.
Firstly, BTC dominance does not focus on competing cryptocurrencies. Not every altcoin is in competition with Bitcoin, as many altcoins aim to collaborate with Bitcoin to strengthen their respective ecosystems. Therefore, BTC dominance does not consider the differing goals of various altcoins versus BTC.
Secondly, BTC dominance does not offer stablecoin growth. It may appear that BTC dominance is decreasing when more people are transferring their fiat into USD-pegged stablecoins. Although stablecoins are technically "altcoins," there is no expectation that these tokens will change in value. To examine BTC's relationship with speculative altcoins, calculate BTC dominance without stablecoins.
Thirdly, BTC dominance cannot account for scam projects or micro-cap coins. Whenever a new coin is listed on the crypto market, it affects the total crypto market cap, even if these small projects are Ponzi schemes, rug pulls, or have zero chance of long-term success. These coins will impact Bitcoin's dominance percentage.
Finally, BTC dominance does not count lost bitcoins. It is unknown how many bitcoins are stuck in irretrievable wallet addresses, and we do not know how many future bitcoins could get accidentally burned. However, current estimates suggest that at least 20% of BTC's supply is inaccessible. If this is the case, it would change BTC's market cap, which would alter current BTC dominance scores.
Trading Bitcoin Dominance
Here are some profitable strategies to trade Bitcoin dominance:
- Long-term Investing: Investors who prefer a long-term approach can take advantage of Bitcoin's upward trend by buying and holding the asset. This strategy may be profitable if Bitcoin continues to increase in value over time.
- Short-term Trading: Traders who prefer a short-term approach can profit from Bitcoin's price fluctuations by trading on the asset's short-term price movements. This strategy can be profitable if the trader can correctly predict these movements.
- Momentum Trading: Traders can take advantage of Bitcoin's strong network effect by trading based on the asset's momentum. This strategy can be profitable if the trader can correctly predict the direction of the momentum.
- Altcoin Investing: Investors can invest in altcoins when they observe a decrease in Bitcoin dominance compared to alts. This strategy can be profitable if the investor can identify altcoins with strong growth potential.
The Future of Bitcoin Dominance
Decentralized Finance (DeFi) and decentralized applications (dApps) are rapidly expanding areas within the cryptocurrency industry. However, Bitcoin's inability to support dApps means that it is not part of this growth. As these new features continue to gain more users and popularity, Bitcoin's dominance in the market is expected to decline.
Despite this, experts suggest that Bitcoin dominance will still be a relevant metric in certain situations. Presently, every token in the market is compared to Bitcoin. However, more relevant comparisons are those that serve the same purposes, such as a peer-to-peer transaction system and a store of value. In such instances, Bitcoin dominance may still be important for making investment decisions.
The Bottom Line
While Bitcoin dominance is a useful metric for understanding the cryptocurrency market, it's important to recognize its limitations in reflecting the true value of Bitcoin. The market cap, which is often used to measure dominance, can be impacted in artificial ways by factors such as pre-mined coins and hard forks. Furthermore, market cap doesn't necessarily translate to an increase in money flow.
In the early days of crypto trading, Bitcoin had a dominance score of 100% as it was the only cryptocurrency available. As the market has grown, Bitcoin's dominance has naturally decreased. However, this shift in dominance is neither inherently good nor bad. Instead, it provides insight into the evolving nature of the cryptocurrency market.
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