Bitcoin Dominance: Worth Measuring?

written by @emylacapra

Bitcoin Dominance is Threatened by One Asset Only… and It’s Not an Altcoin.

The first Bitcoin alternatives were Namecoin and Litecoin, both created in 2011 to experiment with more privacy and different mining algorithms while using much of the same code as Bitcoin. Since then, the experimentation has continued and thousands of other altcoins were designed, with currently around 5000 of them being listed in the cryptocurrency market.

Market capitalization is often regarded as a way to establish the importance and the consequent value of a cryptocurrency. While it can be tracked down from different sources like CoinMarketCap or TradingView, the way to evaluate dominance is the same and reflects the way it is calculated in the stock market; that is by multiplying the price of a coin (or share) with its circulating supply. To obtain market dominance, simply divide the market cap by the total market capitalization of all coins (or shares).

Bitcoin dominance according to the cryptocurrency market capitalization stands at 65% at the time of writing. At the apex of its value, in December 2017, when it hit $20K, its dominance was ~54%. It had already lost much of its dominance to Ethereum in June of the same year when it had dropped to 38%, from 87% recorded in February. Around that time the cryptocurrency world had already started to experience the infamous ICO craze that affected Bitcoin’s dominance throughout the following year.

Speaking of the other top two cryptocurrencies by market cap, Ethereum dominance dropped from its ATH of 32% in June 2017 to just over 9% at present. Ripple XRP dominance fell from its ATH of 18% in May 2017 to just over 3% currently. It recently lost its third position to Tether USDT in CoinMarketCap ranking.

 

Flaws in Measuring Market Dominance

Although Bitcoin dominance appears explicit even from a simple market capitalization metric, analysts believe there are better values that should be studied, considering that it lacks specific criteria and factors that compromise its overall accuracy.

First, the metric does not take into account factors like the approximately four million zombie bitcoin, which are lost forever – including Satoshi Nakamoto’s 1 million bitcoin -, and the number of bitcoin stored long-term, which also affect the overall market vitality and direction.

Second, and most importantly, it works well for the stock market in which the value of companies’ stocks is calculated analogously across the whole market; whereas, for the cryptocurrency ecosystem, things get more complicated.

Let’s see why.

As it is relatively easy to build your own cryptocurrency, clearly the higher the number of assets in the market, the bigger the segment taken away from Bitcoin.

For instance, a useless coin or token might have a 2.5B circulating supply and be manipulated into trading at $1 bringing its market capitalization to $2.5B with a market share amounting to 1%, according to the current overall market value of ~$250B. This would take the coin/token straight up to the top 20 cryptocurrencies of the market, despite it being unheard of, unused, or lacking any infrastructure whatsoever.

This is the reason why many view Bitcoin dominance through market capitalization as a meaningless metric considering the amount of new coins and tokens added to the market all the time.

 

Better Metrics Exist

What would, therefore, best represent the real value of Bitcoin or any alternative coin, to have a more accurate perspective of the market?

Liquidity, above all, represents a good evaluation of the market.

According to analysts at Arcane Research, if we consider liquidity instead of capitalization, Bitcoin dominance is currently set at 85-90%, which is roughly 20% higher than officially evaluated. By liquidity, we mean real trade volume and what is reported by Bitwise as more orderly and regulated volume as opposed to fake or volume “inflated” by exchanges to attract more customers.

With Bitcoin dominance at 90% in the overall cryptocurrency market, the rest of the crypto assets, including major coins like Ether, Ripple XRP, and Litecoin, would amount to only 10%. Could it be that this figure is rarely brought up to avoid discouraging altcoins traders? Indeed, the liquidity that any of the altcoins offer across multiple exchanges is not even comparable to that of Bitcoin and is only challenged by stablecoin Tether USDT.

We can further reinforce Bitcoin dominance over altcoins by considering other factors like its impressive 99.99% uptime and its security increased over time by its tremendous hash rate that inevitably inspires more confidence among investors.

Scarcity is another metric that could be used. A circulation of 18M bitcoin out of the limited 21M that will ever be mined, goes a long way against a current circulation of 111M of Ethers and 44B of XRP, and an infinite number of ETH and XRP coins that could still be issued.

When investigating certain altcoins, many will find echoes of fiat currencies with infinite supplies and high issuance rates, reminiscent of legacy monetary policies we’ve experienced recently.

Another metric that is rarely taken into consideration is the Trends Chart in google searches. Even here, the comparison with the other top cryptocurrencies is barely worthwhile making. For example, Bitcoin vs Ethereum or Bitcoin vs XRP charts clearly show how the top cryptocurrency is by far the most searched crypto asset by people looking to dive into the crypto world.

 

Bitcoin Dominance vs. Stablecoins

The unlimited ability to print money in the fiat world works in sharp contrast to Bitcoin halving which periodically reduces the cryptocurrency issuance through an immutable monetary policy set by its protocol.

Stablecoins, in a way, reflect that ability as they are pegged to fiat currencies like the US dollar. Their market value recently surpassed $10 billion, having surged by over 70% in just two months, according to Stablecoin index data. Tether’s (USDT) market capitalization stands at about $9 billion, continuing to dominate the stablecoin ecosystem with around 85% of the total market share. Stablecoins have an edge over bitcoin as a base trading pair because of their inherent price stability which makes traders feel safer holding and using them as a liquidity tool for trading.

Stablecoins often get excluded from the market dominance equation with Bitcoin since many argue that including an infinitely inflated fiat currency that also serves as the unit of measurement to determine dominance would skew the very metric you are trying to assert.

 

Bitcoin Dominance vs. Gold

Bitcoin’s utility as an uncensorable form of hard digital money is still its main, proven use case, which is why it is often referred to as “digital gold”.

Frankly speaking, it’s gold that is increasingly establishing itself as bitcoin’s real competitor. Or vice versa. Therefore, it makes sense to track the digital asset’s dominance against gold rather than altcoins, which are easily manipulated and inflated.

Over the last few years, bitcoin has enhanced its proposition as a store of value side by side with gold. The digital asset does not hold centuries of monetary history behind it, but it has certain advantages over the precious metal.

Bitcoin is more decentralized to start with, as opposed to gold’s inherent centralization imposed by its custodian’s direct submission to governments and central banks’ control. As a matter of fact, no online gold transaction can be executed without either permission (custodial) or counterparty risk (pegged tokens held by a custodian). Unless individuals own physical gold, the metal is held by banks rather than by them.

BTC also functions as a much better system for transferring wealth anywhere in the world in a matter of minutes along with the ability to be stored with a simple security passphrase. This is an excellent protection against theft or government-approved confiscation. Well-known cypherpunk Nick Szabo has even posited that “Central banks will end up using bitcoin as a reserve currency over gold” for security reasons.

Based on these assumptions, bitcoin’s future as a store of value and a new monetary system appears extremely bright.

 

Still Room to Grow

At present, the entire gold market is estimated to be around $9 trillion while Bitcoin is only $166 billion in size. If we take into account both markets combined, gold’s dominance is 98.47% vs bitcoin’s 1.43%. This figure is also reflected in Google Trends Bitcoin vs Gold chart, showing that interest in gold over bitcoin is on average five times higher.

It is undeniable that gold overshadows the entire cryptocurrency market as an asset class today. Bitcoin is often referred to as a safe haven asset, but gold is still owning that use case.

For Bitcoin to really establish itself as a new economic standard, it needs to hit a six-figure number over the coming years and increase the kind of dominance that really matters: against gold.