If you want to understand the dynamics of the cryptocurrency market, it helps to think of it as a solar system with Bitcoin at its center, which attracts the huge amount of coins of various sizes that revolve around it. The term that describes this effect is bitcoin dominance, and it’s an important concept to understand, but what exactly is bitcoin dominance.
What is the domain of Bitcoin?
A simple definition of the domain of bitcoin is the share of bitcoin in the total market capitalization of all cryptocurrencies. The market value is calculated by multiplying the coins in circulation by the current price.
So when Bitcoin was the only cryptocurrency in existence, it was 100% dominant. With the launch of other coins, including bitcoin forks, this force has started to weaken and dilute in terms of market capitalization.
Market capitalization may not be an ideal measure of dominance in the broad sense, but we are talking about price and market, which are the easiest to measure. So when you visit a price aggregator like Coinmarketcap or Coin gecko, you see a dynamic value by domain and graph.
Why is bitcoin dominance important?
Returning to our spatial analogy for the crypto ecosystem, just as the sun has a decisive influence on the planets in its orbit – through gravity – Bitcoin influences the projects of the crypto universe through price.
Price is a dominating element, so the price of bitcoin has a strong correlation with all other coins. However, prices are not completely locked in. The degree of correlation is relative to the idea of mastery. The chart above shows the swing from 100% dominance in 2013 to a point four years later when Ethereum was within 6% of the crypto ecosystem’s new sun.
As with most things cryptographic, there is specific language to the idea of a change of domain that is often described as a reversal. The idea of changing domain is important because it illustrates the competitive nature of cryptocurrencies. Each coin (planet) tries to influence more, which in the case of Bitcoin vs Ethereum is due to their different consensus method: PoW vs Proof of Stake.
Bitcoin maximalists believe that there can only be one planet in the solar system and that Bitcoin will eventually consume everyone else in between. Ethereum Maximalist has the same view and so on across the rich and diverse ecosystem.
So bitcoin’s dominance is a proxy for bitcoin’s evolving impact on the crypto ecosystem and the importance of Proof of Work and its relationship to decentralization, a key element of maximalism.
Since Proof of Work requires constant energy consumption, it has an impact on the environment, which is a highly political issue, and dominance is also a measure of acceptance of this basic requirement.
There is even a competitive dominance index, the Real Bitcoin Dominance Index, which only compares proofs of working coins. For now, it includes Ethereum, although it is transitioning from Proof of Work to Proof of Stake. The successful transition is expected to have a significant impact on dominance.
Dominance of Bitcoin and the bull market
When you tabulate the year-to-year comparison, you see that there is no linear model as simple as the dominance that is gradually eroding Bitcoin. This is due to the effect of bull and bear markets, shown in bold. Dominance is measured from 1 January, unless otherwise stated.
During bull markets – times of optimism – prices are high, but this enthusiasm is disproportionately visible in alt-coins. Altcoins contain stablecoins that play a vital role in the transition from fiat money to cryptocurrencies, but the ease of creating new coins and recreational trading behavior contribute to the change in control over altcoins.
This behavior can be described as a mix of unit bias and FOMO. Equity bias is an irrational focus on low-denomination coins because they are “cheaper” than coins like Bitcoin, and FOMO – Fear of Missing Out – is much more common in booming markets where new investors are looking for the hot new project. I hope it goes 100 times.
The chart shows that the bear and bull cycle lasted about four years, which corresponds to the Bitcoin halving cycle, but there is no certainty of a repetition. The crucial question is whether altcoins are indeed becoming more dominant at the expense of bitcoin, or whether the growing interest in the two major currencies is not only lifting all the boats but also disproportionately increasing interest in altcoins.
This is truly a fundamental question for the entire cryptocurrency industry. Will Bitcoin always remain at the center of the crypto universe, exerting a dominant influence over all other coins, or will its power fade away in the shadow of ethereum or altcoins?