Though Bitcoin (BTC) and the rest of crypto are currently in the doldrums, there are some noteworthy signs of change.

What signs, you ask? Bitcoin dominance.

Image credit: 123rf

Indeed, Bitcoin is on the rise, with its measure of market dominance topping 45% this week, This shows that money is leaving altcoins and heading for the perceived safety of the original crypto asset. This trend reveals a series of insights into the crypto market.
But first, it’s important to clarify: “Bitcoin dominance is the ratio between the market capitalization of Bitcoin to the total market cap of the entire cryptocurrency market,” according to Bybit Learn. In other words, it shows how much money is in Bitcoin compared with the rest of the crypto market.

For example, if the whole crypto market has a market cap of US$1 trillion and Bitcoin has a market cap of US$500 billion, then Bitcoin makes up half the total market cap of the entire market, putting its dominance at 50%.

Historically, the original cryptocurrency’s dominance rises during bear markets because its price falls at a slower pace than the rest of the crypto market. Traders move funds from altcoins into bitcoin because if it corrects 30%, for example, then altcoins will suffer a much deeper correction. This strategy allows traders to accumulate more altcoins when the market turns around.

However, historical data on this metric is thin: Until 2017 and the beginnings of the bubble in initial coin offerings (ICOs), bitcoin spent most of its life above 90% market dominance. After 2017, we saw the rise of altcoins, especially Ether, competing for market share.

Image credit: 123rf

In 2017, investors saw altcoins making far greater gains than bitcoin and moved capital elsewhere in crypto. That year, Bitcoin dominance fell from 90% to 36% while altcoins went on a huge bull run.

After the ICO bubble burst, Bitcoin’s dominance rose in the ensuing bear market. People sold their falling altcoins and moved back to the older crypto asset.

Interestingly, in 2020, bitcoin rallied beyond altcoins – hitting an all-time high at the time of $20,000 in December with 70% market dominance.

This demonstrates the psychology of crypto markets: When things are bad and prices are falling, people move money to Bitcoin. We’ve seen this recently: When Terra collapsed, Bitcoin dominance increased, even as the Luna Foundation Guard sold vast amounts of bitcoin on the open market in an attempt to save TerraUSD’s peg.

A prolonged bear market is much tougher on altcoins as they have smaller market caps and inspire less faith in investors. Thus, Bitcoin benefits from the “flight to safety” narrative. Looking at 2020 is instructive as bitcoin’s rally far outpaced altcoins at first before making way for the so-called “alt season.”

We can speculate that what happened in 2020 was due to investor caution. After the ICO bubble burst in 2017, it was followed by a prolonged bear market, in which most altcoins got wrecked. When positive sentiment returned, money first flowed into bitcoin, as it had proven that it could survive tough times. Then, when bitcoin started to slow down, money moved into altcoins as investors searched for further gains.

Today, as the stock and crypto markets enter a bearish phase, we’re seeing an ongoing flight to quality. “This could see [Bitcoin] dominance rally all the way back to 60%,” said Twitter user IncomeSharks in a recent tweet. “There’s a good chance we could see money leave alts and start going back to BTC.”
And here’s the silver lining: As Bitcoin dominance has been on the rise since January, its continued increase shows the bear market is working its way through the system — and there should be better times ahead.