Bitcoin dominance on the rise once again as crypto market rallies

The rise of the BTCD index could be a sign of the start of another bull run as Bitcoin price attempts to hold on to $38,000.

Bitcoin’s price has been rallying in tandem with altcoins, sending mentions of the markets flipping back to a bullish supercycle for Bitcoin (BTC). The flagship cryptocurrency went through the resistance levels of $42,000 for the first time since May 19, hitting a peak of $42,541 on July 31. 

Alongside the market rally, the Bitcoin dominance (BTCD) index has been seeing an uptrend as well. As per data from TradingView, BTCD hit a 3 month high of 49.2% on July 31. The last time it was at these levels was back in May when it was on the decline from the yearly high of 73.6% it hit at the start of January.

The BTCD index is calculated using the ratio of the Bitcoin market versus the rest of the cryptocurrency market. As the name suggests, being the flagship crypto asset indicates the dominance that Bitcoin has over the rest of cryptocurrency tokens.

Speaking with Cointelegraph about the market rally being led by Bitcoin, Pete Humiston, manager at Kraken Intelligence, the research division of Kraken, a cryptocurrency exchange, stated: “Because altcoins felt the brunt of the sell-off over the past few months and because BTC is crypto’s ‘safe haven’ asset, a rally in dominance indicates that market participants are reluctant to rotate back into altcoins.”

It’s also important to note that the last time the BTCD index was at these levels, it was on its way down from a high in January amid the full-blown bull market. Whereas it is currently on the uptrend from the lows it hit in mid-May. Back in May, altcoins like Ethereum (ETH) were outperforming BTC which led to the dominance dropping below 40%. This time around, however, BTC has been making gradual price gains that not all altcoins have been able to match, thus leading to the rising BTC dominance.

A bull market might not lead BTCD to rise further

In addition to the market capitalization being significantly larger than the rest of the crypto assets, keeping stablecoins aside, Bitcoin is the most highly traded crypto-token in a 24-hour period with Ethereum being a close second. However, stablecoins are known to impact Bitcoin dominance as well due to huge influxes in that market. A prime example of this was back in April when a $3 billion USD Coin (USDC) influx led to the Bitcoin dominance hitting its lowest since August 2018.

Humiston further spoke on what the market conditions would need to be like to sustain the ongoing uptrend in the index, saying that, “Until it’s clear as day that we’re entering back into a bull market uptrend, we can expect folks to remain relatively risk-averse, altcoins to underperform and BTC dominance to trend higher.”

JPMorgan’s global market strategist, Nikolaos Panigirtzoglou, recently mentioned in an interview with CNBC that if the Bitcoin dominance goes past 50%, it could be an indicator of whether the “bear phase is over or not” for the cryptocurrency markets. However, as seen in the bull run starting in late 2020 and even in 2018, the BTC dominance usually rises at the beginning of recovery after a slump and drops during euphoric phases of the market. Usually, this period of euphoria is followed by a major correction and then the cycle repeats itself.

It is also noteworthy that even though BTCD is used as a measure of market sentiment when looked at in purely percentage terms, it’s often not the most reliable indicator. As the cryptocurrency markets mature, it is inevitable that some altcoins will become more resilient to crashes and lead to a decline of Bitcoin dominance.

A report from Stack Funds was released in May after BTC dominance dropped to nearly 40%, revealing that the index could bounce back and mark the end of the market slump. Shaun Heng, vice president of growth and operations at CoinMarketCap, a cryptocurrency ranking and analytics platform, told Cointelegraph:

“Although Bitcoin is volatile, I believe it will still dominate the market for a while to come. Bitcoin is the basis for which all other cryptocurrencies were made, and while I don’t expect to see it reach the heights it did in the past, I also don’t think it will fall off considerably in the foreseeable future.”

While Bitcoin is often considered to be the safe-haven asset of the cryptocurrency markets, this “sentiment recovery” that Bitcoin is witnessing saw it regain some of what was lost during the start of the summer. ETH has shown 12.1% over the last seven days compared with Bitcoin’s 3.30%.

Ethereum flipping Bitcoin?

In a recent development, the CEO of Pantera Capital, Dan Morehead, mentioned that the transition of Ethereum to Ethereum 2.0 (Eth2) network will help Ether outpace Bitcoin. In addition to ETH’s price rally, the Ethereum network is also soon to undergo a major update. In a benchmark event toward the migration of the blockchain to an entirely proof-of-stake network, on August 4, the highly anticipated London hard fork takes place which adds five Ethereum Improvement Proposals (EIPs), including the EIP-1559.

This is a new transaction pricing mechanism that alters the dynamic expansion and contraction of block sizes to improve scalability. This is set to change the way network fees are managed by incentivizing miners for prioritizing transactions.

Related: More like ‘shock-to-flow’ — BTC price hits bull trigger as mystery buyers scoop up supply

Even though this is a huge change for the network and is highly anticipated in the community, Humiston mentioned why this might not impact the macro trend of the markets any time soon: “Because the impact of the London hard fork/EIP-1559 will take time to materialize and BTC dictates the macro trend, we don’t anticipate August 4 will ignite a new alt season.”

He even added that since the hard fork is a high-profile event that is perceived as a long-term tailwind for the token, the event could be a case of “buy the rumor, sell the news,” leading to a short-term weakness for ETH. However, it is also possible that the hard fork could support another rally for ETH. It’s important to recognize that due to the high correlation between the price movements of ETH and BTC, ETH may not rally based on the hard fork development single-handedly and it would need BTC to hold above $40,000 levels for a rally to be possible.

Even though Ethereum’s market capitalization is only 18% of the entire crypto market — less than roughly 50% of BTC’s market capitalization — its utilization in the decentralized finance (DeFi) markets often makes it a contender for the top-ranked token by 24h trading values. In fact, early in July, a Goldman Sachs analyst said that Ether could overtake Bitcoin as the most dominant digital currency as it seems to be the one with the “highest real use potential.”

However, Heng opined that “There is a high correlation between Bitcoin performance and that of altcoins, even with Ethereum. As Bitcoin value drops, so do the values of altcoins. And Bitcoin’s performance in the past is in part what boosted altcoin availability today.”

A sign of things to come?

As Bitcoin’s dominance maintains its rebound along with price levels holding above $38,000, the premium cryptocurrency continues to quash the “flippening” narrative that the drop in Bitcoin’s active addresses over two weeks brought back into the spotlight. In addition to MicroStrategy’s CEO, Michael Saylor pledged to buy more BTC. Even though the firm holds over $400 million in “paper” losses, he said that there is no reason to not hold Bitcoin for 100 years.

Related: NFTs are next for enterprise Ethereum, says ConsenSys founder Joe Lubin

Apart from institutional investors like Saylor keeping their faith through the market slump, it appears that even the retail investors have not given in to the fear, uncertainty and doubt (FUD) surrounding the crypto-verse in the recent past. A report from Crypto.com revealed that the number of crypto users worldwide has more than doubled from 100 million in January this year to 220 million in June. Such re-enforced support noticed in the market adds to the positive sentiment often contributing to higher price stability for BTC — a characteristic that is usually expected from mature assets in the financial markets.

This ongoing uptrend in Bitcoin dominance could very well be a sign of another bull market season getting triggered. From what was witnessed in the bull run that began in Q4 2020 and lasted until May 2021, the BTC dominance first rose to a yearly high of 73.5% before the rest of the altcoins caught up to its proportional price action, leading to a full-blown bull market. If this trend repeats itself, the crypto community could be in for another market dominated by the bulls, and the rising BTC dominance is the flag bearer for that event.