Bitcoin used to utterly dominate the crypto market, but its dominance dipped in recent years -- and now it's rising again. How does this trend affect crypto investors?
The cryptocurrency market is growing up in many ways. Right now, Bitcoin (BTC -0.58%) is rebuilding the sector dominance it lost in two sharp drops several years ago. Does that mean it's high time to double down on the largest and oldest name in crypto or that investors should pick up undervalued altcoins at a discount? Or does the right plan of action lie somewhere in between those extremes?
Let's take a look.
Bitcoin dominance by the numbers
All my sources agree -- Bitcoin is rebuilding its lost market dominance. The coin accounts for roughly 56% of the crypto market's total value today. That's up from a trough of approximately 39% in November 2022 and an even steeper drop to 32% in January 2018.
Now, Bitcoin has a long way to go before regaining the absolutely crushing market dominance it showed in the early days. Until Ethereum (ETH -0.12%) rose to prominence in 2017, Bitcoin's iron-fisted grip on the crypto market consistently stayed above the 90% mark. And Ethereum's second-place peak never rose above 24%.
Long story short, Bitcoin has always set the tone for the broader crypto market. Its leading role has only grown more pronounced recently after a seven-year dip.
What's the bigger story?
Bitcoin's rising dominance comes on the heels of two important events.
First, the Securities and Exchange Commission (SEC) finally approved 11 applications to launch exchange-traded funds (ETFs) based on Bitcoin's spot price. This launch of spot Bitcoin ETFs gave institutional investors and other traditionalists an easy way to access the Bitcoin market without opening a new account with a cryptocurrency trading platform. Seven months later, the leading iShares Bitcoin Trust ETF (IBIT 1.37%) has built a portfolio of $21.7 billion in direct Bitcoin holdings. The increased demand should lift Bitcoin's price in the long run.
Second, Bitcoin executed the fourth instance of halving the rewards for mining the cryptocurrency. As a result, the supply of new coins is now growing slower than the global supply of physical gold, arguably changing the game for long-term wealth holders. These halvings tend to drive radical increases in Bitcoin's price every four years, starting several months after each adjustment. Less than four months after April's halving, that effect hasn't kicked in yet, but the economic model for crypto miners is under heavy pressure.
What's next for the Bitcoin-to-altcoin balance?
From here, the shifting dominance could inspire several game-changing events, some mutually exclusive.
- Bitcoin may simply solidify its status as a "digital gold" and a safe-haven asset, attracting conservative investors and institutions during times of market uncertainty. In this scenario, it's every altcoin for itself, and Bitcoin's dominance could keep rising.
- Innovative altcoins with unique value propositions could gain market share as investors seek higher returns and diversification beyond obvious Bitcoin bets. Big winners under these circ*mstances might include the Web3 token Polkadot (DOT 0.16%),Ripple's (XRP -0.11%) global payments system, and the high-speed smart contracts platform Solana (SOL -0.98%), just to name a few. Whether Bitcoin soars or not, each name on this list could carve out an ultra-specific market niche in a blockchain-based global economy.
- Ethereum just might build on its leadership in smart contracts via technical upgrades over the next few years. Here, so-called "Ethereum killers," such as Solana and Avalanche (AVAX -1.20%), would melt away over time and chiefly leave the crypto market divided between Bitcoin and Ethereum.
- Fearing a crypto market entirely under Bitcoin's control, regulators could introduce new rules that are less favorable to Bitcoin's expensive Proof-of-Work operating model. Or maybe they'd prefer supporting the Bitcoin model, setting up legal and economic roadblocks for competing systems. Either way, the law of unintended consequences suggests the new rules might not deliver the expected results.
How to invest in crypto right now
What can crypto investors do against this backdrop?
First, the wide variety of potential outcomes shows that the crypto sector is as volatile and unpredictable as ever. Experienced investors like Ark Invest's Cathie Wood see bright futures for Bitcoin and Ethereum. More traditional investing geniuses, such as Warren Buffett, want nothing to do with these newfangled digital transaction ledgers whose value isn't tied to any physical asset.And the fluctuating chart of Bitcoin's dominance could swing downward again in a heartbeat -- or not.
In short, nobody really knows what's next, and Bitcoin's dominance trend isn't guaranteed to keep rising. I understand if this volatile market is too rich for your blood, causing you to stay on the sidelines with Warren Buffett. On the other hand, maybe Cathie Wood has the right idea and the long-term wealth of tomorrow will be found in blockchain wallets.
There are no right or wrong answers here, only informed guesses and your own analysis. All in all, crypto should play a supporting role in a diversified investment portfolio.
In my case, for example, direct crypto holdings and Bitcoin ETFs account for less than 5% of my total investment portfolio. I've got skin in the crypto game, but not enough to do real damage if the Bitcoin market fades out. Your mileage may vary, but the vast majority of my crypto-related wallet consists of Bitcoin, with Ethereum and Polkadot battling for a distant second place.
Anders Bylund has positions in Bitcoin, Ethereum, Polkadot, Solana, and XRP. The Motley Fool has positions in and recommends Avalanche, Bitcoin, Ethereum, Solana, and XRP. The Motley Fool has a disclosure policy.
