Bitcoin’s (BTC) market dominance has traditionally been viewed as a key indicator of its market strength. Currently, the metric is at a multi-year high above 51%.
However, a closer analysis suggests that the concept of “Bitcoin dominance” might not be as informative as it seems, especially when considering the differences between web 1.0, 2.0 and 3.0, and the key components of web 3.0.
Dominance: A misleading BTC indicator?
The concept of “Bitcoin dominance” is associated with the portion of BTC’s total market capitalization of all digital currencies. While it appears to reflect Bitcoin’s market power, this metric is mainly determined by the trading activities between BTC and Ether (ETH), the second-largest cryptocurrency and the most considerable altcoin by market capitalization.
This dynamic can cause an inaccurate perception of Bitcoin’s dominance, particularly when major changes happen within the ETH/BTC trading pair.
However, ETH’s “dominance” or share of the crypto market has been fairly consistent for the past few years at approximately 17% — while the inverse relationship between BTC.D and ETH/BTC is easily visible in the chart below.
The role of stablecoins and “sidelined” capital
Adding complexity to the interpretation of Bitcoin’s dominance is the role of stablecoins like Tether (USDT), the second-biggest “altcoin” by market dominance at around 6.3% today.
USDT’s market cap growth is often not a direct result of cryptocurrency market activity but rather an influx of what can be termed “sidelined” capital—funds that are essentially in dollars and often waiting to enter the market sooner or later.
Therefore, the increasing market cap of stablecoins like USDT doesn’t necessarily reflect an investment in cryptocurrencies, but rather the preparedness of investors to engage or hedge their crypto exposure.
Meanwhile, the share of everything else that’s not Bitcoin, ETH or USDT is only at around 25% and falling from multi-year highs of 35% in 2022, which is a stark contrast to the differences between Web 1.0, 2.0 and 3.0.
Bitcoin “strength” or Ethereum market dynamics?
Throughout 2023, the narrative of Bitcoin’s dominance has been variable. Although it seemed to gain control at the beginning of the year, this was more a consequence of the ETH/BTC trading dynamics than of a general market movement.
Likewise, when Bitcoin’s dominance seemed to decrease, as it happened with the Shapella upgrade that had an effect on ETH prices, this was more related to Ethereum’s market movements than to a decrease in Bitcoin’s overall market “strength.”
In conclusion, the dominance chart may not be the ultimate metric to understand Bitcoin’s position in the market. Influenced heavily by the ETH/BTC trading pair and synthetic dollars, it provides a limited view of the market.
It is important to consider a more comprehensive approach to market metrics that takes into account the multiple aspects of cryptocurrency investments and movements.
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