Key takeaways

  • Bitcoin dominance reflects Bitcoin’s share of the total crypto market cap. It rises during bear markets as investors seek safety in Bitcoin and falls during bull markets when altcoin speculation increases. 
  • Bitcoin’s price is sensitive to macroeconomic factors like interest rates and quantitative tightening. During periods of high rates and reduced liquidity, Bitcoin behaves like a “risk-on” asset, with its price declines often dragging down altcoins.
  • Institutional investors primarily enter crypto through Bitcoin, given its perceived stability and regulatory acceptance. The development of Bitcoin ETFs, especially spot ETFs, has driven significant institutional inflows, benefiting both Bitcoin and broader crypto markets.
  • WBTC enabled Bitcoin liquidity to enter the Ethereum DeFi ecosystem, boosting TVL on protocols like MakerDAO and Aave. 

Younger chains such as Solana and Sui use airdrops and incentives to attract decentralized finance (DeFi) liquidity, but sustainable growth in DeFi requires real-world applications, improved crosschain interoperability, better security and regulatory clarity to foster broader adoption and long-term success.

The cryptocurrency market is a complex ecosystem, with Bitcoin at its core. As the first and most valuable cryptocurrency, Bitcoin (BTC) serves as both a bellwether for the industry and a driver of broader trends. Its price movements can significantly impact altcoins and decentralized finance. 

This article explores these dynamics, covering Bitcoin dominance (BTC.D), macroeconomic factors, historical market cycles and how innovations like Wrapped Bitcoin (wBTC) and new blockchain ecosystems are shaping the DeFi landscape.

Bitcoin dominance (BTC.D)

Bitcoin dominance measures Bitcoin’s market capitalization as a percentage of the total cryptocurrency market. Historically, BTC.D has fluctuated, reflecting the market’s shifting preferences between Bitcoin and altcoins. A high BTC.D indicates stronger confidence in Bitcoin as a store of value or a response to market uncertainty, while a low BTC.D suggests increased investor appetite for higher-risk altcoins.

Bitcoin dominance chart

BTC.D typically rises during bear markets, when investors seek relative safety in Bitcoin, and declines during bull markets, when speculative interest in altcoins surges. For example, Bitcoin dominance exceeded 60% during the 2018 bear market, while in 2021, it dropped to below 40% as altcoins such as Ether (ETH) and Solana (SOL) gained prominence.

The drop in BTC.D during the bull market of 2021 can be explained by a sustained Bitcoin rally that created enough investor liquidity to be circulated into altcoins, effectively leading to an altcoin season and a drop in BTC.D.

Correlation with interest rates and quantitative tightening

Bitcoin’s price is increasingly influenced by macroeconomic conditions, such as interest rate policies and quantitative tightening (QT). Historically, Bitcoin has been seen as a “risk-on” asset, meaning its price tends to rise when investors are willing to take risks. During periods of low interest rates and monetary expansion, such as 2020, Bitcoin thrived alongside other speculative assets.

Quantitative tightening is a monetary policy tool used by central banks to reduce the amount of money circulating in the economy. It typically involves either selling government bonds and other financial assets from the central bank’s balance sheet or letting these assets mature without reinvesting the proceeds.

By decreasing the money supply, QT aims to curb inflation and stabilize the economy, but it can also lead to reduced liquidity in financial markets, higher interest rates and lower asset prices, including stocks, real estate and cryptocurrencies.

However, the dynamics shifted in 2022 and 2023 as central banks worldwide raised interest rates to combat inflation. QT, which reduces liquidity in financial markets, also weighed heavily on Bitcoin’s price, reducing speculative flows into the crypto market. Consequently, Bitcoin’s movements often serve as a bellwether for altcoins, with downward pressure on BTC spilling over into broader crypto markets.

The sequence of market shifts: From Bitcoin halving to altcoin season

Bitcoin’s halving cycle, occurring approximately every four years, has a profound impact on market dynamics. The halving reduces the block reward for miners by 50%, creating a supply shock that often triggers a price rally.

The typical sequence is as follows:

  • After the halving, Bitcoin’s price often surges due to reduced supply and increased demand.
  • As Bitcoin leads the rally, capital flows into BTC, increasing BTC.D and reducing interest in altcoins.
  • Once Bitcoin’s price stabilizes, investors seek higher returns via altcoins, leading to a rotation of capital and a surge in their prices for the altcoins. As a result, BTC.D decreases, reflecting the arrival of “altseason.”

The Sequence of market shifts

Bitcoin has historically seen impressive returns ranging from 8x to 100x within 12–18 months following halving events. For example, following the 2020 halving, Bitcoin’s price surged to new all-time highs by late 2021. As BTC.D peaked, altcoins like ETH and SOL experienced significant rallies, marking the transition to an altcoin season.

As of 2024, BTC increased by around 33% in the seven months after the halving, indicating the potential for upward movement over the next year. Bitcoin’s price growth has been notable, and its dominance in the market remains on a rising trajectory.

A key factor to watch is if Bitcoin experiences a cooldown and moves into a sideways trend. In such a case, liquidity may flow into altcoins, leading to substantial gains for lower-cap cryptocurrencies. However, rapid BTC price increases also carry the risk of significant corrections, with altcoins potentially losing 30%–50% of their value.

Effective risk management through diversification and a clear understanding of long-term and short-term strategies is essential, particularly in the volatile crypto market. Additionally, staying informed about regulatory changes, security issues and the decentralization of assets will help mitigate external risks.

Institutional capital and Bitcoin ETFs

Institutional capital often enters the cryptocurrency market through Bitcoin, seen as the most established and least volatile asset in the space. Bitcoin’s strong regulatory footing, broader adoption and recognition as digital gold make it the preferred entry point for institutions looking to gain crypto exposure.

The growth of Bitcoin exchange-traded funds (ETFs) has already facilitated institutional investment. ETFs offer a regulated, accessible and liquid way for traditional investors to participate in the Bitcoin market without directly holding the asset. For instance:

  • The launch of Bitcoin futures ETFs in 2021 saw significant inflows from institutions wary of directly getting involved in decentralized finance (DeFi) and self-custody.
  • Spot Bitcoin ETFs have allowed institutions to gain exposure to the actual asset rather than derivatives, unlocking billions in new capital.

The chart below highlights how BlackRock’s spot Bitcoin ETF has grown to $40 billion, effectively bringing mainstream capital into the cryptocurrency world.

Blackrock’s Bitcoin Spot ETF's growth to $40 billion

These developments have led to a surge in Bitcoin demand, driving up its price and increasing BTC.D. As institutional investors allocate more capital to Bitcoin, some of this liquidity is likely to trickle into altcoins and DeFi projects, further boosting the broader crypto market.

DeFi’s evolution and Wrapped BTC’s impact

DeFi’s rapid growth in 2021 was significantly influenced by Bitcoin liquidity entering the Ethereum ecosystem through Wrapped Bitcoin (wBTC). WBTC, an ERC-20 token pegged 1:1 to Bitcoin, allowed Bitcoin holders to participate in DeFi activities such as lending, borrowing and yield farming without selling their BTC.

The integration of wBTC into DeFi protocols like Aave and MakerDAO boosted Ethereum’s total value locked (TVL), which peaked at over $100 billion in 2021. By enabling Bitcoin liquidity to flow into DeFi, wBTC bridged the gap between Bitcoin’s store-of-value narrative and Ethereum’s utility as a decentralized application (DApp) platform.

However, this growth also highlighted risks such as over-centralization in custodial models for wBTC and the fragility of speculative-driven TVL growth.

The rise of younger chains: Solana and Sui

As the DeFi ecosystem matured, new blockchains such as Solana and Sui emerged, offering faster transaction speeds and lower costs compared to Ethereum. These younger chains have adopted aggressive strategies to attract liquidity and users, including airdrops and liquidity mining programs.

These strategies have enabled these chains to capture some of the liquidity flowing out of Bitcoin and Ethereum. 

However, the sustainability of such growth is questionable, as it often relies on short-term incentives rather than long-term value creation.

Sustainable adoption for DeFi

While DeFi has made significant strides, its future growth depends on addressing critical challenges and building a more sustainable ecosystem. Key strategies include:

Integrating real-world use cases

Tokenization of real-world assets (RWAs) such as real estate, bonds and commodities can bring traditional finance into the DeFi ecosystem. The Solana and Ethereum blockchains are already pioneering in this space, offering tangible value beyond speculative trading.

Enhancing crosschain interoperability

Seamless movement of assets between chains can reduce fragmentation and enhance liquidity. Protocols like Wormhole and LayerZero are developing infrastructure to connect disparate blockchain networks.

Improving security and UX

Security breaches and complex interfaces continue to be major obstacles to DeFi adoption. Even for experienced crypto users, exploring a new blockchain can be intimidating. 

Simplifying onboarding processes and improving user education are key to attracting a wider audience. Integrating Web2-style onboarding and providing seamless on- and off-ramp solutions can help appeal to a mainstream audience.

DeFi has also been plagued by smart contract and oracle hacks. During the previous Bitcoin cycle, the Ronin and Wormhole bridges lost a total of over $500 million to hackers. These risks must be managed better to attract large-scale capital into this space.

Regulatory clarity

Large financial services institutions are still nervous about participating in DeFi because of a lack of regulatory framework. Clear regulatory frameworks can foster institutional adoption while protecting retail investors. Collaboration between DeFi projects and regulators is essential to balance innovation and compliance.

Bitcoin’s price movements, dominance cycles and integration with DeFi continue to shape the broader cryptocurrency landscape. As Wrapped Bitcoin enabled a wave of innovation in 2021, younger chains are now exploring new ways to grow TVL. 

However, for DeFi to thrive sustainably, it must focus on real-world applications, crosschain interoperability and secure user-centric designs. Bitcoin may remain the anchor of the crypto market, but its influence extends far beyond price charts, driving innovation and capital flows that define the future of decentralized finance.

Written by Arunkumar Krishnakumar