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Official Press Release

13 October 2022

Updated: 19 October 2022

What Is Bitcoin Dominance?


What Is Bitcoin Dominance?

Table of contents

The extreme volatility in the crypto market exposes traders to many potential risks and opportunities. Market participants develop various tools to solve this problem and use specific indicators to monitor price movements for the best trading decisions.

One of these tools is the "Bitcoin Dominance Index," which helps traders define the market trend between altcoins and Bitcoin (BTC). Since Bitcoin is the first and largest crypto in the market, an index using BTC's strength as a major determinant will be a fundamental tool in trading other assets.

Bitcoin Dominance Explained

Bitcoin dominance compares the market capitalization of Bitcoin (BTC) with the combined market capitalization of all other assets in the market. This measurement gives an insight into the sentiment around Bitcoin and other crypto assets and also points to market opportunities. Aside from measuring how well BTC is performing, Bitcoin dominance has also been instrumental in predicting trend changes and determining the sentiments of market participants.

Altcoins play a significant role in calculating Bitcoin dominance. The number and performance of all available crypto assets in circulation determine the ratio in which BTC dominates other cryptocurrencies. Bitcoin dominance reveals just how much preference the average crypto trader has for Bitcoin over altcoins, or vice versa.

The formula to calculate Bitcoin dominance is as follows:

Bitcoin dominance = Bitcoin market cap / Total cryptocurrency market cap

Factors Influencing Bitcoin Dominance

Some of the major factors influencing Bitcoin dominance include:

After the launch of the Bitcoin network, BTC controlled over 90% of the entire crypto market for the majority of its early life. However, as new coins emerged, Bitcoin lost some of its nearly unrivaled attention to other crypto assets. These new projects launched with promising use cases that eventually caused a significant reduction in Bitcoin's overall dominance.

The Bitcoin network aimed to facilitate the global peer-to-peer transfer of value. Newer projects learned from this and offered users more features in addition to transferring value. These projects now have use cases across various sectors, including gaming, art, and DeFi, reducing the need for people to solely want and use BTC.

Bear or Bull Market

In the early stages of a bull market, when the crypto market starts becoming more profitable for many traders, Bitcoin dominance is higher, as more people trade BTC pairs. However, as the bull run continues and new coins enter the market, people begin to trade more altcoins hoping for quicker and larger returns. During the later part of a bull run, altcoins start to meet these expectations and record significant rises in short periods. This sequence of events usually causes a reduction in Bitcoin's dominance.

A bear market could also reduce Bitcoin's dominance. In the early stages, traders take profits and deposit funds in stablecoins to protect their portfolios against volatility. As the market caps of stablecoins rise, Bitcoin's dominance reduces.

On-Ramping Through Stablecoins

Compared to fiat currency, stablecoins provide a practical means to access a range of crypto assets. This is because although some gateway exchanges convert fiat currency into cryptocurrencies, they sometimes offer a limited selection of assets. These selections mostly only include well-known crypto assets and stablecoins. However, crypto-to-crypto exchanges often provide a wider range of crypto assets to trade with certain stablecoins. People looking to trade nearly any asset can do so using stablecoins, which take some of Bitcoin's market share and reduces its dominance.

The Introduction of New Coins

During a bullish run, several new altcoins, like the various ERC-20 tokens, are introduced into the market as traders look for new crypto assets to capitalize on. This influx takes some attention away from Bitcoin and reduces its dominance. However, the hype behind these new coins may fade after some time, resulting in traders moving funds back to more trustworthy assets like BTC. This again increases Bitcoin's market share.

How to Use Bitcoin Dominance to Your Advantage

The following are a few ways traders can leverage Bitcoin's dominance to determine Bitcoin's trend in the crypto market and spot the beginning of the altcoin season.

Using BTC Dominance to Determine the Strongest Trend

Traders can use the Bitcoin dominance index to determine the strength of BTC's trend and whether Bitcoin shows greater earning potential than altcoins at any given time. Bitcoin's dominance ratio helps people plan and place high-probability trades.

Using BTC Dominance to Spot Altcoin Season

Altcoin season occurs when the total market share of altcoins outperforms Bitcoin for extended periods. During the altcoin season, more altcoins emerge in the market and perform relatively well, causing Bitcoin's dominance to weaken. This allows crypto traders to monitor Bitcoin's dominance to determine the beginning and end of the altcoin season.

Is Bitcoin Dominance a Reliable Indicator?

The Bitcoin Dominance Index is one tool people should have in their arsenal when trading cryptocurrencies. It is primarily a reliable macro indicator that can help traders figure out how to maximize profits in the crypto market. Nonetheless, Bitcoin dominance has some limitations as a reliable indicator. One such limitation is that the crypto market is constantly evolving as more altcoins enter the sector with powerful use cases. This may mean that Bitcoin's dominance will continuously reduce in the long run, eventually losing its usefulness as an indicator.

A Determinant of Future Events?

Although a change in Bitcoin dominance can often suggest a shift in market sentiment, it may be far from actual market behavior. Traders can only draw correlations and probabilities from changes in Bitcoin dominance and the subsequent shifts in market sentiments. Nonetheless, many traders acknowledge that changes in Bitcoin's value and dominance compared to altcoins tend to relate to the likelihood of certain events playing out in the markets. This is because many of these correlations have played out repeatedly and may happen again in the future.

AtomicDEX — HODL and Trade BTC + Other Cryptocurrencies

To explore crypto assets and trading opportunities using the Bitcoin Dominance Index in the various market phases, try the AtomicDEX wallet. AtomicDEX is a non-custodial wallet, cross-chain/protocol bridge, and cross-chain/protocol decentralized exchange rolled into one application. It supports BTC, ETH, BNB, DOGE, LTC, and much more.