Although thousands of altcoins are available on the market, Bitcoin — the first cryptocurrency — remains the largest digital asset by market capitalization. Studying the dynamics of Bitcoin's share in the cryptocurrency market, some traders noticed certain market patterns and began to develop trading strategies according to BTC price movements. But will the dominance of the first cryptocurrency always be such an important factor in the crypto market? Let’s find out in this article.
What is Bitcoin dominance?
The Bitcoin Dominance is a popular technical indicator that was established in 2017 and is widely used by major analytical platforms. It represents the ratio of Bitcoin's market capitalization to total market capitalization. Typically, 125 tokens of varying sizes were chosen (this quantity may differ based on the indicator type), and the outcome was then multiplied by 100.
The primary purpose of the Bitcoin Dominance Index is to provide traders with a comprehensive understanding of the overall market situation and emerging trends. A rise in investor confidence in the blockchain can lead to a decrease in Bitcoin dominance, while a decrease in confidence is usually associated with an increase in Bitcoin dominance. This is because when investors trust the blockchain and its potential, they are more likely to explore alternative cryptocurrencies and diversify their crypto portfolio.
It should be noted that this indicator is not a signal generator. It enables the analysis of price changes from a different perspective and anticipates future changes based on available information, concluding solely from data gathered from the Bitcoin dominance chart.
Historical context
The index emerged in response to the need for a universal measure that would allow crypto traders to compare numerous altcoins and determine their current market trends. A corresponding chart appeared after the ICO boom in 2017, but the index gained popularity only in 2021.
How has Bitcoin's Dominance changed historically
- Early years: high dominance. Bitcoin appeared in 2009 and dominated by almost 100% in the first few years. In 2013, there were only a few altcoins on the market, and the dominance of BTC was 94%.
- 2017: The fall of dominance. In February 2017, Bitcoin’s dominance was 96%; however, by the beginning of 2018, it had fallen to 37%. This was the time of the ICO boom when ether and other altcoins became popular.
- 2018-2020s: restoration of dominance. After a sharp drop, Bitcoin’s dominance began to recover in 2018, when the Altcoin market experienced a downturn. In 2019, the indicator returned to approximately 70%, and by 2020, it ranged from 60-70%.
- 2021: A decrease in dominance. In 2021, interest in decentralized finance (DeFi) and non-fungible tokens (NFT) reduced Bitcoin’s dominance. The capitalization of the coin has grown significantly, but its market share has decreased amid the popularity of new cryptocurrencies and technologies. By the end of 2021, this indicator fell below 40%.
- Currently, in June 2024, the dominance of Bitcoin is approximately 55%, according to Trading View.
BTC's influence on the crypto market
The indicator itself does not affect anything, but the market share occupied by the flagship cryptocurrency can hint at the optimal course of action. If the share of Bitcoin increases, then clones of the Bitcoin network often rush. The performance of Litecoin, ZCash, and other BTC-like networks may increase significantly due to investor interest.
However, the correlation between altcoins and Bitcoin is not always clear. Here is an example. Following this logic, you can expect EVM (Ethereum Virtual Machine) - )-compatible platforms to lose value with the growth of BTC. But this is not always the case as cryptocurrencies of EVM-compatible networks often receive a boost in growth during the strengthening of Bitcoin's dominance.
The price of BTC has consistently been a key driver of crypto market trends. When the price of BTC rises, it often leads to a surge in the prices of other cryptocurrencies, as investors seek to capitalize on growth. Conversely, the BTC price drop can lead to a decline in altcoins’ prices as investors become risk-averse and seek to protect their investments.
Factors contributing to BTC's dominance
Several factors have contributed to BTC's dominance in the crypto market. First, its fame, widespread adoption, and immutability have made it the most accepted cryptocurrency. Second, its decentralized nature and limited supply make it an attractive option for investors seeking a store of value. Finally, its use as a medium of exchange and potential for long-term growth has made it a key indicator of the market's overall direction.
Case studies of market secoupling
Despite Bitcoin's (BTC) significant influence on the cryptocurrency market, there have been instances where other cryptocurrencies have detached from the price of Bitcoin. For instance, during the 2017 cryptocurrency boom, the price of Ethereum (ETH) surged significantly, even as the price of BTC remained relatively stable. the surge was attributed to the increasing adoption of ETH as a platform for decentralized applications and its rising popularity in initial coin offerings (ICOs).
However, there are many examples of cryptocurrencies that have grown against the market, despite the impact that Bitcoin has.
- Ethereum (ETH): Unlike Bitcoin, Ethereum has not only not lost popularity, but also continues to develop, gaining new functions and applications. This led to an increase in its capitalization and popularity.
- Ripple (XRP): Ripple is one of the fastest cryptocurrencies in the banking industry which multiplied its market capitalization in early 2018 while Bitcoin was wobbling around the same 20k mark.
- Binance coin (BNB): the cryptocurrency of the biggest crypto exchange that grew several times in 2019 during Bitcoin price stagnation.
Such examples demonstrate that other cryptocurrencies can gain market weight without depending only on Bitcoin price movements.
Potential for decoupling
Several emerging trends could potentially lead crypto assets to decouple from BTC price in the future:
- Growing adoption of altcoins and other platforms: The increasing use of altcoins and platforms offering a broader range of functions (smart contracts creation, dApps development, etc.) beyond Bitcoin.
- Increased adoption in DeFi applications: The growing use of cryptocurrencies in decentralized finance (DeFi) applications, could shift focus from price to utility and use cases.
Conclusion
To this day, we have observed that crypto-market trends typically align with the price of BTC because of its historical dominance, brand recognition, and utility as a store of value and medium of exchange. Although there have been occasional instances of decoupling in the past, the factors that uphold BTC's dominance are substantial and may hinder decoupling in the future. Nevertheless, emerging blockchain use cases like smart contracts and decentralized app development can prompt a transition from BTC's dominance towards a more diversified crypto market.
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