What is Bitcoin dominance?

If you want to understand the dynamics of the cryptocurrency market it helps to think about it as a solar system, at the heart of which sits Bitcoin, exerting a gravitational force on a vast range of coins of different sizes orbiting around it. The term that describes that influence is Bitcoin dominance and it is an important concept to understand, but what exactly is bitcoin dominance

The simple definition for bitcoin dominance is the proportion of the entire market capitalisation of all cryptocurrencies that bitcoin accounts for. Market capitalisation is calculated by multiplying coins in circulation with current price.

So when bitcoin was the only cryptocurrency in existence, its dominance was 100%. As other coins, including forks of bitcoin, were launched, that power began to be diminished and diluted as measured by market capitalisation. 

Market capitalisation might not be the ideal measure of dominance, in a broader sense, but we’re talking about price and markets, which are the simplest to quantify. So when you visit a price aggregator like Coinmarketcap or Coingecko you can see a dynamic value for dominance and chart.

If we return to our space analogy for the crypto ecosystem, just like the Sun exerts a key influence on the planets within its orbit - through gravity - so bitcoin influences the projects within the crypto universe through price. 

Price is a component of dominance so bitcoin's price has a strong correlation to all other coins. Prices don’t, however, move in complete lock-step. The degree of correlation is relative to the idea of dominance. 

Looking at the chart above you can see the fluctuation from 100% dominance in 2013 to the point four years later where Ethereum came within 6% of being the new Sun in the crypto ecosystem.

As with most things in crypto, there is a specific language to the idea of changing dominance, often described as a flippening. The idea of changing dominance is important because it illustrates the competitive nature of crypto. Each coin (planet) is trying to exert more influence, which in the case of Bitcoin vs Ethereum comes down to their different consensus method - PoW vs Proof of Stake.

Note: Ethereum was also Proof-of-Work until it fully switched to Proof-of-Stake in September 2022.

Bitcoin Maximalists believe that there can only be one planet in the solar system, and that eventually all others will be consumed by Bitcoin, at the centre. Ethereum Maximalists hold the same view, and so on throughout the rich and varied ecosystem. 

So Bitcoin dominance is a proxy for the changing influence of Bitcoin over the crypto ecosystem and the relevance of Proof of Work and its relationship to decentralisation, which is the central element of maximalism. 

As Proof of Work requires consistent energy consumption, it impacts the environment which is a hugely political issue, dominance is also a measure of the acceptance of that fundamental requirement.

There is even a rival dominance index called the Real Bitcoin Dominance Index which only compares Proof-of-Work coins. It used to include Ethereum, only because it was also a Proof-of-Work coin, though is now fully migrated to Proof-of-Stake. The success of that transition, so far, has had a positive effect on Ethereum dominance and is expected to continue to have a significant impact.

When you tabulate a yearly comparison you can see that there isn’t a simple linear pattern, such as a gradually weakening dominance of Bitcoin. This is because of the influence of Bull and Bear Markets, which are in bold. Dominance is measured from the January 1st, unless otherwise stated.

During Bull Markets - periods of optimism - prices are inflated, but that enthusiasm is disproportionately seen within altcoins. Altcoins do include stablecoins, playing a crucial role as the on-ramp from traditional (fiat) money, to crypto, but the ease with which new coins can be created, and recreational trade behaviour contributes to fluctuation in altcoin dominance.

The most recent bull market in late 2021 demonstrates this perfectly, as in the table above, where Bitcoin dominance fell by almost half, taken up mostly by altcoins, while Ethereum doubled its market share. Cut to a year and a half later, however, when crypto has just endured a difficult year in 2022, and only barely recovering, and we see Bitcoin strengthening its dominance once more.

It is likely to climb even more, taking more of the market share from altcoins, and we can expect this trend to continue creeping up until the next rally ensues.

That behaviour can be described as a mix of unit bias and FOMO. Unit bias being an irrational focus on coins with low nominal price as being ‘cheaper’ than those, such as Bitcoin, and FOMO - Fear of Missing Out - far more prevalent within an accelerating market where new investors look for the hot new project that they hope will go 100x.

The table shows that the bear/bull cycle was roughly four years, corresponding with Bitcoin’s halving cycle, but there is no certainty that will be repeated. 

danheld

The crucial questions is whether altcoins are genuinely becoming more dominant at the expense of bitcoin, or that a rising tide of interest in the two main coins, not only lifts all boats, but disproportionately boosts interest in altcoins.

This really is a fundamental question for the whole crypto industry. Will Bitcoin always remain at the centre of the crypto universe, exerting a dominant influence on all other coins, or will its power fade to be overshadowed by Ethereum or altcoins?