You can see the momeary chart of Bitcoin Dominance below. Using this tool, you can easily analyze the dominance of Bitcoin on the digital currency market.
What is Bitcoin Dominance? in a simple word
Bitcoin dominance is a measure that shows the market value (market cap) of Bitcoin relative to the total market value of digital currencies.
For example, if the dominance of Bitcoin is 40%, it means that Bitcoin has a 40% share of the eire digital currency market, or to be more precise, it has allocated 40% of the value of the digital currency market.
If the above explanations are not enough to understand this concept, then with the help of an article compiled from the Learncrypto website, we will first examine the dominance of Bitcoin, then we will explain the reason for its importance, and finally we will poi to the signals that can be obtained from this concept. did
First of all, it is necessary to state that “dominance” literally means “dominion” and this definition also applies to Bitcoin. Therefore, Bitcoin dominance means the dominance of Bitcoin over the market of digital currencies and other currencies in this market.
The easiest way to determine the dominance of Bitcoin is to calculate the ratio of the market value of Bitcoin to the total value of digital currencies; Therefore, when Bitcoin was the only digital currency available, its dominance was 100%; But with the creation of new digital currencies, including Bitcoin forks, this 100% domination gradually decreased.
Perhaps market value is not an ideal measure to calculate dominance in its broadest sense, but the subject of our discussion here are concepts such as “price” and “market” which are very easy to represe in quaitative form; In other words, the dominance of a currency can depend on various factors, but it is difficult to show them quaitatively.
This is why when you visit websites like Coinmakertcap or Coingecko that show the curre price of various cryptocurrencies, you will see varying amous of dominance and charts for each currency.
Why is Bitcoin Dominance importa?
Let's go back to the solar system analogy for the digital currency ecosystem. Just as the sun has an importa effect on the planets orbiting around it through gravity, Bitcoin also has an importa effect through the factor “Price“, has an effect on the existing projects in the world of digital currencies.
Price is one of the compones of dominance, and for this reason, the price of Bitcoin has a direct and strong relationship with the price of other digital currencies. However, this does not mean that all currencies have such a strong influence and the price change of any currency affects other currencies. The truth is that the degree of influence is proportional to the degree of dominance.
If you look at the chart above, you can see Bitcoin's dominance swing from 100% in 2013, to a poi four years later where Ethereum was only 6% away from usurping its place and becoming the new sun of the ecosystem. Is.
It is ieresting to know that, like other concepts in the world of digital currencies, change of dominance has its own term. Flippenning is one of these terms; Changing the ownership of a digital currency is called flipping. A shift occurs when the market value of one digital currency overtakes that of another. Shifting dominance is importa; Because it shows the competitive nature of the digital currency market.
In this competition, every digital currency is trying to exert a wider influence. For Bitcoin and Ethereum, this competition is manifested in their differe consensus methods. Bitcoin uses the Proof of Work consensus algorithm and Ethereum is moving towards the full implemeation of the Proof of Stake algorithm.
Bitcoin maximalists believe that in this system, only one planet can survive and all other digital currencies will eveually be wiped out by Bitcoin. Of course, this belief is not unique to Bitcoin and is also seen among the maximalists of Ethereum or any other digital currency that exists in this vast market.
As such, Bitcoin's dominance reflects its changing influence in the digital currency ecosystem, the influence and popularity of proof-of-work, and its relationship with deceralization, which is a core eleme of maximalist thinking in this field.
Because proof of work requires consta energy consumption and has negative environmeal impacts, this issue is highly political. Therefore, the dominance of Bitcoin is also a measure to measure the acceptance of this basic need.
There is another competing indicator of dominance, which isReal Bitcoin Dominance IndexIt is called (Real Bitcoin Dominance Index). This index only compares cryptocurrencies that use the proof-of-work consensus method. This index currely also includes Ethereum; Because this digital currency currely uses proof of work and is moving to proof of stake. A successful transition is expected to have a dramatic impact on Bitcoin dominance.
Using dominance in analyses
If we make a comparison table of the annual dominance of Bitcoin and other digital currencies, we will notice that the changes of dominance do not follow a linear pattern; That is, it is not the case that, for example, the dominance of Bitcoin will gradually weaken. The reason for this is the effect of the bull and bear markets, which are bolded in the table below. The amou of dominance in the table below is calculated for each year from January 1st of that year; Except for the last one whose date is meioned.
In bull markets, i.e. periods when optimism dominates the market, prices grow due to the ehusiasm of buyers; But this ehusiasm is not evenly distributed among altcoins.
It should be noted that the “altcoin” category is a broad category and includes a diverse range of currencies. For example, stablecoins, which play an importa role as a gateway from traditional money (fiat) to digital currencies, are included in the category of altcoins; But due to the ease of creating new currencies, a wide range of emerging and unknown currencies are included in the same category, which causes the dominance of altcoins to fluctuate.
Many analysts consider the decline of Bitcoin's price dominance equal to the beginning of the season of altcoins or altseason; That is, they believe that when the dominance of Bitcoin reaches 40%, we can expect a strong growth of altcoins.
In addition, there is a topic called “trading for fun” that is more common among altcoins and is one of the other reasons for the volatility of altcoin dominance.
Trading for fun can be described as a combination of unit bias and fear of missing out (FOMO). The perfect unit bias is an irrational conclusion that cryptocurrencies with a low nominal price are considered “cheaper” than other cryptocurrencies such as Bitcoin.
The fear of freezing or fomo is also said to be the state in which investors rush to invest in a new project that they hope will grow 100 times.
The above table shows that this bear/bull cycle lasted for almost four years and was parallel to the halving cycle of Bitcoin; But it is by no means certain that this symmetry will be repeated again. If you wa to know more about halving, we suggest the article “What is halving?” read the
Now, the basic question is whether the dominance of altcoins has increased due to the increase in the dominance of Bitcoin or not? Or in other words, is the growth of the two main digital currencies (Bitcoin and Ethereum) like a wave that follows the growth of the adoption of all altcoins?
Will Bitcoin forever remain at the ceer of the cryptocurrency world and exert its hegemonic influence over altcoins? Or will its power decline and be overshadowed by Ethereum and altcoins? Only time can tell us the answers to these questions.
