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Bitcoin Dominance Ratio: What is it and how can traders use it?

There are nearly 26 thousand cryptocurrencies in the market today (CoinMarketCap).

Currently, Bitcoin is the largest cryptocurrency in terms of market capitalisation (market cap), with a value of over $588 billion, and currently accounts for approximately 50% of the entire $1.18 trillion global cryptocurrency market (as of 27 June 2023).

Bitcoin's dominance in the cryptocurrency market is due to its status as the first-ever cryptocurrency, which came into existence in 2009. This is why all other cryptocurrencies that are not Bitcoin are designated as "altcoins" by the market.

When Bitcoin was first launched in 2009, it had 99% of the crypto market cap share. By the time Ethereum came along in 2015, Bitcoin dominance slipped to between 80-90%. As more crypto projects launched their coins/tokens the global crypto market cap increased and liqudity in the market flowed into these highly speculative cryptos. Over the years Bitcoins dominance has fluctuated in response to major events like the ICO (Initial Coin Offerings) boom of 2017-18, bullish and bearish market sentiments and Bitcoin halving events.

Below is a table of Bitcoins dominance compared with other popular altcoins.

Source: CoinMarketCap - Major Cryptoassets By Percentage of Total Market Capitalization (Bitcoin Dominance Chart)

Bitcoin Dominance Ratio

So how is the Bitcoin dominance ratio or Bitcoin dominance index, calculated and why is it important to traders?

The formula to calculate dominance is:

Bitcoin Dominance = Bitcoin Market Cap / Total Market Cap

Where Bitcoins market cap is calculated as:

Bitcoin Market Cap = BTC Price x Circulating Supply

When you calculate Bitcoin's market cap, it is the Price of BTC rather than the Circulating Supply that carries more weight in the formula. This is because the supply of BTC into circulation does not increase significantly but has a rather slow and steady rate of increase (via mining), also there will only ever be a maximum supply of 21 million BTC. This mean Bitcoins Price movement becomes the main driver to determine its dominance in the global crypto market.

Historically, major altcoins tend to have a strong positive correlation with Bitcoin and react in step with its price movements. This means that Bitcoin's performance can serve as a useful metric for traders looking to find trends among major altcoins. But this historic relationship may not always be so closely connected in the future, especially as new altcoins come to market and existing ones evolve into thriving ecosystems.

Factors affecting Altcoin Market Cap

Altcoins can be created or minted through pre-mining, have a fixed supply that gets strategically released, through token sales (aka ICOs) and some can be burned, all of which affect Circulating Supply. There is also the variety of functionality and utility among altcoins (e.g. NFTs, DAO tokens, stablecoins, meme coins, smart contracts) that provide investors with an opportunity to explore speculative coins and contribute to altcoin market cap growth. It is important to compare Bitcoin with specific altcoins, i.e BTC pairs. This highlights the performance of a particular altcoin against Bitcoin and gives a ‘benchmarking’ status in order to gauge performance, offer insights into market dynamics, asses trading opportunities and asses volatility.

These key factors impact the altcoin maket cap.

  1. Bitcoin Dominance: High Bitcoin dominance and price uptrend attracts more investment, resulting in lower altcoin market cap.

  2. Market Sentiment: Positive or negative news, regulatory developments, lawsuits and market trends influence investment decisions.

  3. Technological Advancements: Upgrades to protocols, technological advancements or breakthroughs in specific altcoin projects can attract growth.

  4. Adoption and Real-World Use Cases: Altcoins that demonstrate practical utility, thriving ecosystems, partnerships with established companies, or integration into existing systems may attract more investment and drive market cap growth.

  5. Network Effects: Altcoins with strong network effects, including a large user base, active community, and developer ecosystem. Network effects can lead to increased liquidity, trading volume, and overall market interest in an altcoin.

  6. Regulatory Environment: Regulatory developments and government policies regarding cryptocurrencies can provide a conducive environment for altcoin growth, while unfavourable regulations may restrict market access or even derail a project.

  7. Market Speculation and Hype: Speculative activity and hype surrounding an altcoin can lead to rapid increases or decreases in market cap. Speculative buying or selling based on market trends, rumours, or pump-and-dump schemes can significantly impact an altcoins market cap.

  8. Overall Market Conditions: The broader market conditions, including the performance of major cryptocurrencies like Bitcoin and Ethereum, investor risk appetite, economic factors, and geopolitical events, can influence altcoin market cap. During bullish market periods, altcoins often experience increased market cap, while bearish market conditions can lead to decreased market cap.

All these interconnected factors end up influencing the global crypto market cap.

Large Market Cap Stablecoins

Major stable coins like USDT and USDC are witnessing some of the largest market caps due to their de-facto digital US dollar status. According to CoinMarketCap, USDT is ranked #3 and USDC #5. They can be used to mitigate exposure to volatile market conditions by moving money out of riskier coins to park them into a stablecoin with 1:1 ratio to the US dollar.

Using Bitcoin Dominance to trade

Traders can use the Bitcoin dominance ratio to identify if either Bitcoin or altcoins are currently trending stronger and look to apply their trading strategies. Traders can also asses the extreme values of the Bitcoin dominance ratio to understand potential opportunities.

Identifying Altcoin Season

‘Altcoin Season’ is a period when altcoin prices increase compared to Bitcoin, typically following a significant increase in Bitcoin's price. Liquidity in the market starts to move into other cryptocurrencies, kick-starting Altcoin Season. Using the Bitcoin dominance TradingView chart along with the BTC price trend table (below), traders can identify potential buying and selling opportunities.

Bitcoin Dominance Bitcoin’s Price Signal

Uptrend Uptrend Buy Bitcoin

Uptrend Downtrend Sell Altcoins

Downtrend Uptrend Buy Altcoins

Downtrend Downtrend Sell Bitcoin

It is important to introduce other trading indicators to build a stronger analysis before executing your trading strategy.

Extreme High and Low Bitcoin Dominance Levels

Another strategy monitors the extreme high and low levels of Bitcoin dominance, which historically have been around 75% and 35%, respectively, see TradingView chart . Looking at the chart, as the Bitcoins dominance approaches 75%, there has been a reversal. Likewise, as Bitcoins dominance was close to 35%, an upward trend began. By monitoring these two extremes, traders can gauge the market trends and make better decisions for entry and exit conditions.

Future usefulness?

It useful to have a few trading indicators in the tool kit because the Bitcoin dominance ratio has a few drawbacks. As mentioned earlier, Bitcoin will continue to compete with new cryptos that come to market and other established (and growing) altcoin ecosystems. We may see the increase of the global cryptocurrency market cap driven more so by advancements in altcoins and protocols rather than Bitcoins ‘digital gold’ status in the future. However, current experiments with Bitcoin ordinals may give the crypto a new level of functionality that could maintain its dominant title. We will have to wait and see. Lets not forget, many of the key factors affecting altcoin market cap (listed earlier) should be taken into consideration as the global crypto market is still subject to volatility inducing events (e.g. SEC lawsuits, Bitcoin halving etc).


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