We Need To Sunset the Misleading “Bitcoin Dominance” Calculation.
Originally written in Feb 2019, then updated partly as a response to this article:
Is it fair to measure the health of a money by comparing it to the economy that drives the money? I’ve been skeptical of using bitcoin dominance for a long time.
Facebook’s Libra coin & large cryptocurrencies like Telegram‘s TON are coming out soon, central banks & governments will be eventually issuing fiat cryptocurrencies & digital hybrid coins.
As value like real estate, fiat & securities transfer to be digitally native tradeable blockchain assets, it doesn’t make sense to use Bitcoin as the denominator & every other digital asset in the world as the numerator, especially for tokens & coins that don’t compete with bitcoin as money.
The more successful Bitcoin is, it’s inevitable that more value will go into blockchain based security tokens, semi-decentralized cryptoassets & stablecoins…their marketcaps will get bigger & bigger.
A perfect example is Tether. It’s not really a cryptocurrency, yet recently it’s trading volume surpassed that of even Bitcoin (most of that volume ironically to trade in and out of Bitcoin). it’s total marketcap is at $4.6 Billion as of Feb 2020. That $4.6 billion of non-cryptocurrency marketcap is included in the numerator of the bitcoin dominance calculation.
The Bitcoin dominance metric was initially created by coinmarketcap as a simple calculation to see how Bitcoin is doing compared to other altcoins, but it has since gained traction as a flawed way to look at the value of Bitcoin compared to all other coins, many of which are not even trying to be ‘currencies.’
It’s no better than just guessing sentiment.
It’s not a relevant metric on both sides of the argument.
Marketcap itself is a flawed metric for 95% of cryptocurrencies which have low liquidity, poor or non-existent market depth & terrible network security.
A better metric would be to use data from sites like coinmarketbook.cc & howmanyconfs.com to assign proper “marketcaps” for cryptoassets that compete with Bitcoin as money.
Then you would have an actionable metric that compares Bitcoin to other altcoins like ZEC, XMR, DCR, LTC, maybe even ETH & EOS, based on the true value of the whole network & it’s properties, not just the illiquid & naive calculation of Price X Total Coins = Marketcap.
In this case, if we used fundamental data & more prudent calculations, the bitcoin dominance would more accurately be much higher.
Currently, the bitcoin dominance metric is only being used triabally to say “look how great bitcoin is” during BTC bull runs and “Look how bad BTC is” during alt season.
Disingenuous actors like Roger Ver use the flawed Bitcoin dominance metric as a political weapon to try to set a false narrative that a declining dominance means bitcoin developers are failing bitcoin, or that bitcoin itself is failing.
There is a narrative that Bitcoin gains dominance over its competitors & is almost at a tipping point where it has gained so much market share, while decreasing the market share of it’s competitors, that it can’t ever be challenged.
I love Bitcoin and think it has a bright future but I don’t agree with that narrative.
To counter that article, I’ll just offer up this chart from coinmarketcap. If that chart was flipped on its vertical axis, it would completely support that article. Instead, it’s the opposite.
-Jeff McDonald
At best it’s a lagging indicator, like google search trends for “buy bitcoin.”
The significant majority of ICOs & altcoins have inflated marketcaps, and not using fundamental data like transaction value or NVT in the calculation makes bitcoin dominance a silly relic of the early wild west days of crypto, before analysts started thinking deeper and creating better metrics.
If there was a better calculation for marketcap, I would be fine with using it — until then I say it’s just as silly to use bitcoin dominance as it is to think Tether is a cryptocurrency.
