Is Bitcoin dominance a good indicator?
Bitcoin dominance is an indicator that shows how strong BTC’s market capitalization is compared to other cryptocurrencies.
The way it is calculated is quite simple, because it is enough to divide the market capitalization of BTC expressed in dollars by the total market capitalization of all cryptocurrencies, including BTC.
For example, at this moment, according to data published by CoinMarketCap, Bitcoin’s market capitalisation is about 190 billion dollars, while the total market capitalization of all cryptocurrencies is about 334 billion dollars. Therefore, 57% of this is Bitcoin, and this percentage is also the value of its dominance.
Also, it is worth mentioning that the market capitalization is calculated banally by multiplying the dollar value of a single token by the total number of tokens in circulation, therefore with almost 18.5 million BTC in circulation at a price of just over 10,000 dollars each, the product is about 190 million dollars.
The dominance of Bitcoin is therefore not fixed but varies over time.
For example, at the beginning of 2020, it was almost 70%, but over the months it has fallen, both because of the increase in value of some altcoins, Ether in primis, and the addition of new cryptocurrencies that have already conquered a relevant market capitalization, such as Polkadot (DOT).
How to interpret the Bitcoin dominance indicator
A variation in Bitcoin dominance can basically mean three things:
- the price of BTC has varied, as the supply chain is relatively constant,
- altcoin prices have changed,
- new altcoins with significant market capitalization have been added.
In light of this, it is hard to establish a valid rule to interpret any variation of this parameter. In other words, it is difficult to use Bitcoin dominance as a good indicator of market trends.
However, sometimes, in particular market conditions, it can give some indication, although not necessarily certain and only vaguely probabilistic.
In the past for example it has happened several times that a rapid reduction of the dominance of Bitcoin due to an increase of the prices of the altcoin has been followed subsequently from a recovery of the previous levels, either due to increase of the price of BTC, or due to reduction of the price of altcoins.
But this phenomenon could also simply be due to the formation and the deflation of speculative mini bubbles on the altcoin market, that by now appear with a greater frequency in comparison to those on the price of BTC.
On the other hand, in the past, there have also been different phenomena, when for example in 2017 the dominance went from 85% to 38% in just four months, then rose again to 62% and then fell back to its lowest ever point below 33% on January 15th, 2018.
Since then it has never returned to 85%, mainly due to the arrival of several cryptocurrencies on the markets that were launched after February 28th, 2017, the last day on which it was so high.
In fact, since then Bitcoin’s dominance has continued to fluctuate, sometimes rising, as in September 2019, sometimes falling, as in recent months, but without an apparent trend, or a level of equilibrium around which to fluctuate.
Perhaps only in the short term, it can sometimes give some indication, but even when its short-term variations are clear the indications that can be drawn from it are not unambiguous.
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