The cryptocurrency market is lively and cyclic, characterized by the phases of dominance of either of the following: (i) Bitcoin, or (ii) “altcoins” (i.e., alternative cryptocurrencies). Bitcoin Dominance is the index that measures the proportion held by Bitcoin in the total market cap, and that is why it is an essential point of reference to detect market trends and investor sentiment. Since Bitcoin is a trendsetter, fluctuations in its dominance may be an indication of a shift in the overall distribution of value within the crypto ecosystem.
Bitcoin Dominance has been under the scrutiny of traders and investors over the years to predict the occurrence of what is known as Altcoin Season, when altcoins gain higher returns and tend to trigger a change of narratives in the blockchain sector. The connection between Bitcoin Dominance and the performance of the altcoins is vital to people who want to increase their profits or reduce risks in the murky cryptocurrency market.
This paper is going to give an in-depth understanding on Bitcoin Dominance, past trends, the variables which drive this metric, as well as the major indicators that altcoin season is on the way. Having made some trades in the crypto market or being an aspiring trader, this article is one guide that will take you through the game of understanding the cycles that define the digital asset market.
Understanding Bitcoin Dominance
What is Bitcoin Dominance?
Bitcoin Dominance is an indicator that shows what percentage of the total market capitalization of all cryptocurrencies is provided by Bitcoin alone. It demonstrates the relative strength and importance of Bitcoin in comparison with other currencies called altcoins. As an example, imagine that the total market capitalization of all cryptocurrencies was $2 trillion, with the market cap of Bitcoin being $1 trillion, Bitcoin Dominance would thus be 50%.
Why Does Bitcoin Dominance Matter?
The Bitcoin Dominance is the indicator that forecasts the market mood and capital distribution in the segment of cryptocurrencies. At the time of high dominance, it is usually a sign that the traders and investors are moving their positions into Bitcoin, which is viewed as a less risky asset, and it mostly occurs at a time when the investors and traders are in the process of uncertainty or risk aversion. In contrast, as the dominance decreases, it indicates that capital is being attracted into the altcoins due to increased risk appetite and desire to become involved with innovation that is not related to Bitcoin.
This is a significant measuring parameter in portfolio allocation and risk management. Traders rely on Bitcoin Dominance to know when to overweight/underweight Bitcoin compared to altcoins to gain better returns by asset-allocating more in altcoin rallies or to hedge by staying in Bitcoin during altcoin-powered markets.
How Is Bitcoin Dominance Calculated?
The standard calculation for Bitcoin Dominance is:
Bitcoin Dominance = (Bitcoin Market Cap) / (Total Crypto Market Cap) x 100%
Market capitalization is obtained by multiplying the current price of Bitcoin by the total circulating supply of BTC. This is the case with every cryptocurrency in order to know the total market cap. This ratio varies because the prices and capitalizations vary up and down through the crypto verse.
Dominance percentage can be changed slightly because some data sources do not count stablecoins or some token types. However, there is a similarity to the underlying principle, which consists in the fact that the Bitcoin Dominance represents a statistical proportion of the entire crypto cake belonging to Bitcoin.
Historical Trends in Bitcoin Dominance
The Early Bitcoin Era
At the very beginning of the era of cryptocurrency, Bitcoin was the whole market. Ranging between 2009 and 2013, Bitcoin monopolized usage by between 90-100 percent since it is the only popular and traded digital money. Other cryptocurrencies, alternative to Bitcoin, such as Namecoin and Litecoin, appeared, but they did not have much impact on the aggregate market cap.
The Rise of Altcoins
The emergence and rise of altcoins is what has led to the decline of Bitcoin. The introduction of smart contracts with the launch of Ethereum in 2015 was a groundbreaking step, which paved the way for a variety of new blockchain projects that shook the world. By early 2017, the average Bitcoin Dominance had sunk to less than 80 percent, and in the most recent bull run in 2017 (which was accompanied by the ICO boom), the Dominance dropped to below 40 percent as a pool of investor capital moved across most of the new tokens.
DeFi, NFTs, and Shifting Dominance
The crypto bull market of 2020-2021 continued to destabilize the leading factor of Bitcoin. The Boom of decentralized finance (DeFi), non-fungible tokens (NFTs), and Layer 1 and Layer 2 blockchains introduced a new era of innovation. Ethereum and other ecosystems gained huge market share and pushed the Bitcoin Dominance to the lows of 40-41 percent in the middle of 2021. Nevertheless, with every next market collapse, capital gets flown back into Bitcoin, with it once again laying claim to its title of a store of value and a safe haven asset.
What Drives Bitcoin Dominance Up or Down?
Market Sentiment and Cycles
Market psychology is an aspect of dominant existence in the market. When the investors sense fear or uncertainty, e.g., regulation crackdowns, exchange collapse, or macroeconomic impacts, capital flows out of more risky altcoins and into Bitcoin, a symbol of safety. This safety money is driving the Bitcoin Dominance up.
On the contrary, in the scenarios where optimism is shifting and the risk appetite is rising, the capital is directed towards altcoins, and the shares of Bitcoin in the market are brought down. These periods of swing are usually aligned with general crypto bull and bear markets.
Institutional Inflows
The emergence of institutional investors has also affected the Bitcoin Dominance. Depending on the confidence that all institutions have in Bitcoin, many institutions perceive Bitcoin to be the most entrenched and most liquid digital asset, which results in more inflow to it at times of institutional adoption (rhyme or reason of Bitcoin ETFs or corporate treasury reserves). Such inflows have caused a temporary increase in Bitcoin Dominance.
Macro-economic Influences
Wider economic issues such as inflation, interest rates, and geopolitical volatility can push and pull the investor in crypto. More global uncertainty tends to augment the already existing dominance of Bitcoin, especially when Bitcoin is considered as an in-computer hedge or even called a sort of digital gold.
Technological Upgrades and News
Dominance can change as a result of major technological developments or news events. As an example, Ethereum Merge, Bitcoin halvings, or the release of new blockchains with different functionalities may simulate capital flow between Bitcoin and altcoins, influencing the dominance ratio.
Altcoin Season Explained
What is Altcoin Season?
Altcoin Season (also called alt season) is a time frame where altcoins (Bitcoin alternatives) have overemphasized gains over Bitcoin. Along the way, various altcoins that have a higher increase in price, and the overall market discourse switches to innovation, new projects, and adventures outside Bitcoin.
The season of altcoins is usually marked by:
- Lightning speed price rises in an incredible number of alternative crypto-currencies, reduced Bitcoin Dominance
- Explosive developments in fields such as DeFi, NFTs, and new Layer 1s/2s
- Greater numbers of speculation and inflated volumes of trading on smaller-cap assets. 5.2 Altcoin Seasons in History most prominent Altcoin seasons were:
- Spring/Summer 2017: Powered by the ICO craze, Bitcoin Dominance fell below 40 percent, and most altcoins increased by 10x-100x.
- First half of 2021: DeFi tokens, Ethereum, Solana, and the myriad of coins based on NFTs experienced exponential growth, pushing the Bitcoin Dominance further.
These are the times of speculative madness, innovation, and the emergence of new storylines to allure investor interest.
Historical Altcoin Seasons
The most outstanding seasons of altcoins were:
- Spring/Summer 2017: The ICO boom had the effect of reducing Bitcoin Dominance to less than 40%, with a wide variety of altcoins gaining between 10x and 100x.
- First half of 2021: DeFi tokens, Ether, Solana, and a plethora of coins focused on NFTs experienced an incredible boom, once more forcing Bitcoin Dominance even deeper into the abyss.
Those were times of speculative mania, innovation, and the emergence of new stories that captured the imagination of investors.
Indicators of Altcoin Season
There are quite a few indicators that altcoin season has already started or will start very soon: Sharp Decline in Bitcoin Dominance: A persistently declining dominance format is usually seen as the dominance falling below the large support levels.
- ETH/BTC and Other Pair Breakouts: Ethereum and other large-cap altcoins are gaining some ground as compared to BTC in their respective trading pairs.
- Connection: This is not a small number of coins that provided the gains, but a vast majority of altcoins have experienced considerable gains in price.
- Increased Trading Turnover: Especially in decentralized trading exchanges and altcoin pairs.
- Social and Search Interest: Surging search and social media buzz about altcoins.
Relationship Between Bitcoin Dominance and Altcoin Season
Bitcoin Dominance and altcoin season have an inverse relationship. Increases in Bitcoin Dominance typically imply that Bitcoin is performing better than the rest of the altcoins, and this mostly occurs in the later or risky part of a market cycle. Confidence increases and the price of bitcoin becomes stable or consolidated, and investors want a bigger risk/reward payout, so they will start taking a higher risk in the altcoins. Therefore, dominance starts decreasing, and the altcoin season will start.
Generically, altcoin seasons start when a powerful Bitcoin run causes the money earned on Bitcoin to drain into Ethereum and the other large-cap alts, before trickling down into the small-cap tokens. Such a process is also characterized by rotation: the capital goes from BTC to ETH, through top-20 altcoins, and to micro-cap and speculative projects.
Current State of Bitcoin Dominance (as of 2024)
In mid-2024, the Bitcoin Dominance attains levels of 48 percent to 54 percent with a market that remains strongly skewed in favor of Bitcoin, especially with the success of spot Bitcoin ETFs and contributor institutions. Nevertheless, Bitcoin is the main point of entry of new money coming to crypto, and especially to traditional finance.
Nevertheless, the altcoin momentum is already indicated by the growth of total value locked (TVL) in DeFi, the new launch of Layer 1, Layer 2, as well as the slow recovery of the NFT and gaming sectors. These tendencies indicate that the future altcoin boom is being prepared, even though the market portion of Bitcoin is rather high at present.
Signals That Altcoin Season is Approaching
Traders monitor several indicators that can be used to predict when altcoin season may arrive:
- Declining Bitcoin Dominance: Consistent decline, and this is even more likely in case dominance falls below major support zones (e.g., 40%-45%).
- Ethereum Outperformance: Ethereum closing over BTC, and usually a predictor of alt-coin gains.
- The Surge of DeFi and NFT: More activity on non-Bitcoin chains in terms of TVL, trading activity, and new project launches.
- Better appetite for risk: Sentiment growth as the traders want to get more profit, but not just in Bitcoin.
- Broad Participation: It is not only large-cap altcoins, but the mid- and low-cap coins are on the move.
In the past, these may have been precursors of explosive movements in the altcoin market.
Factors That Could Delay or Accelerate the Next Altcoin Season
Factors That Could Delay Altcoin Season:
- New Bitcoin Breakout: In case of a strong new bull market of Bitcoin, a relatively limited amount of capital will flow towards BTC.
- Regulatory Crackdowns: Regulatory uncertainty or a negative judgment against altcoins, DeFi, or stablecoins.
- Macro-economic Shocks: Risk appetite may be suppressed by international recession, increasing interest rates, or geopolitical turmoil.
- Technical Delays: Delays on the upgrades of large networks (e.g., Ethereum sharding, Layer 2 launches).
Factors That Could Accelerate Altcoin Season:
- Bitcoin Price Stabilization: Bitcoin Price Stabilization: Bitcoin frequently goes through a consolidation period after an observed rally which usually leads to rotation of capital into altcoins.
- Significant Technology Breakthrough: Release of much hyped projects or procedures.
- Institutional Diversification: Conventional finance in Ethereum, Solana, and other ecosystems.
- Renewed Retail Interest: FOMO-driven retail inflows into altcoins.
Expert Predictions and Market Sentiment
Industry experts are torn on when the next altcoin season will come. It is estimated that the second half of 2024 or the early part of 2025 will see a significant rotation into altcoins, on 2 counts: the aftermath of the ETF-induced Bitcoin rally, and the rising new applications of Bitcoin in DeFi, NFT, and games. Some say that the institutionalization of Bitcoin can maintain dominance higher in comparison to earlier cycles.
However, there is consensus that altcoin season is a cycle and is bound to happen due to innovation, the psychology of investors, and seeking higher returns. The main idea is to keep track of the level of dominance, the rotation of capital, and new stories that gain attention in the markets.
Risks and Considerations for Investors
As much as altcoin season presents an opportunity to reap huge rewards, it is a risky period. The more volatile nature of altcoins is generally compared to Bitcoin, which has a higher downside market risk during the correction. There is also a high chance of many projects failing, and the regulatory uncertainty will still be a continual threat, especially to DeFi and tokens that are possibly defined as securities.
Diversification of portfolio, management of risk, and adherence to changes in regulations are key elements that need to be considered by anyone involved in the altcoin season. It is also important to prevent the decision of FOMO, as well as it is essential to consider that not every altcoin will survive the next cycle.
Conclusion
An important bit of crypto market chemistry is Bitcoin Dominance and altcoin season, as this has been the trope upon which the entire cryptocurrency sector continues to struggle with the world’s first cryptocurrency and the thousands of innovative projects that trail it. Learning the history, causes, and indications of these trends may help investors better know how to ride the crypto cycles.
Of course, it is difficult to predict when the altcoin boost will take place, but the signs are obvious: when the market grows and the capital turns around, there might be a chance for those who are ready. Remaining informed and risk-but-not-aversive, the participants stand to gain in the cycle of recitation that is bound to occur between the dominance and the wider realm of altcoins.