With Bitcoin (BTC 3.71%) soaring more than 70% to start the year, its overall market capitalization has also soared, to more than $545 billion. As a result, Bitcoin now accounts for about 46% of the entire $1.2 trillion crypto market. Even though there are literally thousands of different cryptos, it seems like the only one that matters right now is Bitcoin.
This ratio of Bitcoin market cap to total crypto market cap, known as Bitcoin dominance, is a popular metric. It has historically been used as a powerful indicator to predict the future price of Bitcoin, as well as to gauge overall market sentiment for crypto. Here's a closer look at what this important Bitcoin metric is telling us now.
Image source: Getty Images.
Bitcoin Dominance trending up
As seen in the chart, the Bitcoin dominance metric has spiked this year, from about 40% at the end of 2022 to the current level of about 46% (it was a bit higher when this chart was created). This suggests that Bitcoin is playing a more important role in the overall crypto market. While other cryptos are also up for the year, Bitcoin is outpacing them in terms of price appreciation.
Data source: Trading View.
There are several possible reasons for this. One explanation, quite simply, is that fear and anxiety in the financial market is pushing people to embrace Bitcoin as a potential safe harbor. When given a choice between a speculative altcoin and Bitcoin, it's a no-brainer for most people these days: You buy Bitcoin. Until the current economic uncertainty clears, one can expect Bitcoin dominance to increase.
Historical levels of Bitcoin Dominance
While the current level of Bitcoin dominance might appear high, it's actually well below historical averages. As seen in the chart, for a long time, Bitcoin dominance was close to 99%. This is because Bitcoin was basically the only crypto in town from 2009 until Ethereum (ETH 2.39%) launched in 2015.
Even with the emergence of new cryptos, Bitcoin dominance was still close to 96% in early 2017. That quickly changed with the initial coin offering (ICO) mania and new buzz around Ethereum. As a result, Bitcoin dominance plunged to less than 40% in a very short period of time. In hindsight, we can now recognize that this foreshadowed the onset of a crypto winter in 2018.
Data source: Trading View.
While it's almost a given that Bitcoin dominance will never reach its old historical highs, it will be interesting to see just how high it will go in the current market cycle. Before the last crypto bull market rally, for example, Bitcoin dominance fluctuated between 60% and 70%, as seen in the chart.
Data source: Trading View.
Thus, one story that this metric could be telling us now is that there will be further consolidation into Bitcoin until we start to hit Bitcoin dominance levels of at least 60%. At that point, the broader market could be ready for a sharp rally, and there could be an explosion of interest around more speculative altcoins.
Putting it all together
The important caveat here is that using a metric like Bitcoin dominance by itself is problematic for long-term investors. You might start to mistake short-term market zigs and zags for long-term market trends.
For example, look again at Bitcoin dominance in 2023. It's not a straight upward trajectory for this metric; there are plenty of head-fakes and feints along the way. Just remember: You are looking for long-term trends, not short-term trading opportunities.
Moreover, it is not so much the absolute level of the metric that matters, as how this metric is changing over time. Simply saying that Bitcoin dominance is at 46% is meaningless. What matters is the context of knowing that it started the year at 40%, so we are in an upward cycle for Bitcoin dominance. Moreover, this metric is still sitting at relatively low historical levels.
That said, the Bitcoin dominance metric is so powerful because it is so simple. There are not a lot of moving pieces, the data is readily available, and the simple math behind this metric enables one to tell very powerful narratives about the crypto market. At the end of the day, there's only a numerator and a denominator for this metric, and it's your job as an investor to figure out what is happening with each.
A bullish signal for Bitcoin?
Generally speaking, a rising Bitcoin dominance metric, combined with strong upward momentum in Bitcoin's price, is bullish. Conversely, a rising Bitcoin dominance metric, combined with a decline in the price of Bitcoin, is potentially bearish for Bitcoin. What I'm seeing here is a bullish signal for Bitcoin: The price is rising, and overall Bitcoin dominance is rising.
Bitcoin traditionally leads the crypto market both higher and lower, and Bitcoin's recent rise appears to be pulling the rest of the crypto market along with it. At some point, investors will have enough confidence to start investing in other cryptos alongside Bitcoin. That's when Bitcoin dominance may begin to decline.
So keep your eyes on Bitcoin dominance in the coming months. As of now, all signals are flashing green for Bitcoin.
