Is Bitcoin a screaming buy right now? This calculation says yes

With Bitcoin (BTC 0.04%) up more than 70% to start the year, its total market capitalization has also risen to more than $545 billion. As a result, Bitcoin now accounts for roughly 46% of the entire $1.2 trillion crypto market. Although there are literally thousands of different cryptos, it seems like the only one that matters right now is Bitcoin.

This ratio of Bitcoin market cap to total crypto market cap, known as Bitcoin dominance, is a popular metric. It has historically been used as a powerful indicator to predict the future price of Bitcoin, as well as to gauge the general crypto market sentiment. Here’s a closer look at what this important Bitcoin metric is telling us now.

Image source: Getty Images.

Bitcoin dominance is increasing

As can be seen from the chart, the Bitcoin dominance value has increased this year, from about 40% at the end of 2022 to the current level of about 46% (it was slightly higher when this chart was created). This suggests that Bitcoin is playing a more important role in the overall crypto market. While other cryptos are also out for the year, Bitcoin is outpacing them in terms of price appreciation.

Data source: Trading View.

There are several possible reasons for this. One explanation is simply that fear and anxiety in the financial market is pushing people to embrace Bitcoin as a potential safe haven. When given the choice between a speculative altcoin and Bitcoin, it’s a no-brainer for most people these days: You buy Bitcoin. Until the current economic uncertainty dissipates, one can expect Bitcoin dominance to increase.

Historic Levels of Bitcoin Dominance

While the current level of Bitcoin dominance may seem high, it is actually well below historical averages. As can be seen from the chart, Bitcoin dominance for a long time was close to 99%. This is because Bitcoin was basically the only crypto in town from 2009 to Ethereum (ETH -0.31%) launched in 2015.

Even with the rise of new cryptos, Bitcoin dominance was still close to 96% in early 2017. That quickly changed with the initial coin offering (ICO) craze and new buzz around Ethereum. As a result, Bitcoin dominance plunged to less than 40% in a very short time. In retrospect, we can now recognize that this heralded the beginning of a crypto winter in 2018.

Data source: Trading View.

While it is almost a given that Bitcoin dominance will never reach its old historical heights, it will be interesting to see how high it will go in the current market cycle. Before the recent rally in the crypto bull market, for example, Bitcoin dominance fluctuated between 60% and 70%, as shown in the chart.

Data source: Trading View.

One story this metric can tell us now is that there will be further consolidation in Bitcoin until we start reaching Bitcoin dominance levels of at least 60%. At that point, the broader market could be poised for a sharp rally, and there could be an explosion of interest around more speculative altcoins.

Put everything together

The important caveat here is that using a metric like Bitcoin dominance is inherently problematic for long-term investors. You may start mistaking short-term market zigs and zags for long-term market trends.

For example, revisit Bitcoin dominance in 2023. There is not a straight upward trajectory for this metric; there are plenty of head fakes and feints along the way. Just remember: You’re looking for long-term trends, not short-term trading opportunities.

Also, it’s not so much the absolute level of the metric that matters, as how that metric changes over time. Simply saying Bitcoin dominance is at 46% is meaningless. What matters is the context of knowing that it started the year at 40%, so we’re in an upward cycle for Bitcoin dominance. Moreover, this calculation is still at relatively low historical levels.

That said, the Bitcoin dominance calculation is so powerful because it is so simple. There aren’t many moving parts, the data is readily available, and the simple math behind this metric allows you to tell very powerful stories about the crypto market. At the end of the day, there’s only a numerator and a denominator for this calculation, and it’s your job as an investor to figure out what’s going on with each.

A bullish signal for Bitcoin?

Generally speaking, a rising Bitcoin dominance metric, coupled with strong upward momentum in Bitcoin’s price, is bullish. Conversely, a rising Bitcoin dominance metric, combined with a decline in the price of Bitcoin, is potentially bearish for Bitcoin. What I see here is a bullish signal for Bitcoin: The price is rising, and overall Bitcoin dominance is increasing.

Bitcoin traditionally leads the crypto market both higher and lower, and Bitcoin’s recent rise seems to be dragging the rest of the crypto market along with it. At some point, investors will have enough confidence to start investing in other cryptos alongside Bitcoin. That’s when Bitcoin’s dominance may begin to wane.

So keep your eyes on Bitcoin dominance in the coming months. As of now, all signals are flashing green for Bitcoin.