Apart from gaining an understanding of what Bitcoin is, we need to analyze its price and value proposition as well. When analyzing crypto, it can get difficult to make a comparison or come up with a solid interpretation of the analysis without any metrics in place. For instance, to analyze equity, we have a truckload of ratios such as ‘Price to equity’ (PE Ratio) and ‘Price to book value’ to name a few. Similarly, Bitcoin dominance and Ethereum dominance are great metrics to analyze Bitcoin and Ethereum individually or the crypto market in general.
1. The meaning and interpretation
Bitcoin dominance measures the market capitalization of Bitcoin to that of all other cryptocurrencies’ market cap. Ethereum dominance measures the same, but consider Ethereum’s market capitalization as a numerator, instead of Bitcoin’s (obviously).
For instance, if Bitcoin market cap is $80 million and all other coins’ market cap is $100 million, Bitcoin dominance would be equal to 80% ($80 million/$100 million).
The objective is to see how much value Bitcoin/Ethereum is gaining in comparison to other coins. If Bitcoin/Ethereum Dominance reduces, it doesn’t mean that their prices are falling. Sure, if the coin’s prices fall, so would their dominance ratio, but there’s another factor to consider. It can also mean that the value of other coins is increasing relatively faster than Bitcoin/Ethereum, whichever coin’s metrics are in question.
2. Effect of the counterpart’s price on the Metrics
From the above example we derived Bitcoin dominance to be 80%. But let’s assume that Ethereum’s price increase gives more return than Bitcoin and it added $20 million more to crypto market capitalization.
Then Bitcoin’s dominance is 80 million/120 million = 66%.
You can see how Bitcoin dominance value reduces significantly in the above calculation because Ethereum’s market capitalization had increased. So, we can safely say that the relative increase/decrease in Bitcoin/Ethereum’s price would negatively/positively affect the counterpart’s dominance value respectively. This would always mean that one of them will gain more steam than the other. With these metrics, it’s very easy to compare Bitcoin vs Ethereum.
3. Bear and bull market’s effect on the Metrics
The very reason we enter a bull market is because people would have become pessimistic about the crypto market or the economy in general. Fear makes people resort to safer assets and, in the case of crypto, Bitcoin and Ethereum are considered safer than other altcoins.
Bitcoin is less volatile and generally loses or gains less market capitalization than Ethereum and other altcoins during a bull or bear market respectively. Hence, we can calculatingly conclude that Bitcoin dominance increases and Ethereum dominance decrease during a bear market and vice versa during a bull market most of the time, unless another factor affects their prices.
Bottom-line
There is more to Bitcoin Dominance than meets the eye. Be completely informed so you can make better and more profitable investing decisions than those who simply speculate.
Disclaimer: The information provided in this article is not intended to provide investment or financial advice. Investment decisions should be based on the individual’s financial needs, objectives, and risk profile. We encourage readers to understand the assets and risks before making any investment entirely.
