Bitcoin’s (BTC) market dominance has traditionally been viewed as a key indicator of its market strength. Currently, the indicator is at multi-year highs above 51%.
However, closer analysis suggests that the concept of “Bitcoin dominance” may not be as informative as it seems, especially when considering the broader dynamics of the cryptocurrency market.
Dominance: A misleading Bitcoin metric?
The term “Bitcoin dominance” refers to Bitcoin’s share of the total market capitalization of all cryptocurrencies. While on the surface it appears to reflect Bitcoin’s market strength, the metric largely represents trading activity between Bitcoin and Ethereum (ETH), the second-largest cryptocurrency and largest by market capitalization of altcoins.
This dynamic could distort Bitcoin’s dominance, especially if there are significant changes to the ETH/BTC trading pair.
Related: Ethereum Slumps 15 Months Relative to Bitcoin – Can Ethereum Price Reversal?
That said, ETH’s “dominance” or share of the crypto market has remained relatively stable at around 17% over the past few years – and the seemingly inverse relationship between BTC.D and ETH/BTC is clear in the chart below visible.
The role of stablecoins and “spectator” capital
Interpreting Bitcoin’s dominance is further complicated by the role of stablecoins such as Tether (USDT), the second most dominant “altcoin” in the market today, currently accounting for around 6.3%.
USDT’s market capitalization growth is usually not a direct result of cryptocurrency market activity, but the result of an influx of so-called “sideline” capital, which is essentially US dollars and usually waits to enter the market sooner or later.
Therefore, the increasing market capitalization of stablecoins such as USDT does not necessarily reflect investment in cryptocurrencies, but rather investors’ willingness to participate in or hedge their cryptocurrency risks.
Meanwhile, the share of all assets other than Bitcoin, ETH or USDT is only around 25% and is down from a multi-year high of 35% in 2022.
Bitcoin “Strength” or Ethereum Market Dynamics?
Throughout 2023, the narrative around Bitcoin dominance has fluctuated. While it appears to have regained dominance at the start of the year, this reflects more on ETH/BTC trading dynamics than overall market movements.
Likewise, there are moments when Bitcoin’s dominance appears to be waning, such as Shapella upgrade affects ETH pricecan better explain the market trend of Ethereum, rather than the decline in the “strength” of Bitcoin’s overall market.
Ultimately, the dominance chart may not be a clear indicator of Bitcoin’s position in the market. The market has tunnel vision, heavily influenced by the ETH/BTC trading pair and synthetic USD.
It is important to consider a more nuanced approach to market indicators that covers the multifaceted nature of cryptocurrency investing and movement.
This article does not contain investment advice or recommendations. Every investment and trading activity involves risks, and readers should do their own research when making decisions.
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