Rise in Bitcoin Dominance Rate Threatened by Fed Rate Cycle

According to crypto asset manager SwissOne Capital, the US Federal Reserve’s (Fed) interest rate cut cycle could halt the ongoing long-term upward trend in bitcoin’s (BTC) dominance rate, resulting in broader gains in the crypto market.

According to data platform TradingView, BTC’s dominance rate, or the cryptocurrency’s share of the total market cap, increased from 38% to 58% in two years. In other words, BTC made faster gains than the overall market and helped the total digital asset market cap double to over $2 trillion.

According to SwissOne Capital, BTC now has limited room to rise further at its dominance rate, as the Fed recently started an easing cycle by cutting interest rates by 50 basis points.

Emphasizing that Bitcoin dominance has a positive correlation with the Fed funds rate, the company points out the decline in the dominance rate during previous discount cycles.

The chart shows that bitcoin dominance in the market rose above 70% and fell in the second half of 2019 as the easing cycle began.

Central banks and governments around the world have injected trillions into the financial system to buffer against the impact of the coronavirus, sparking unprecedented risk-taking in every corner of the financial market, including alternative cryptocurrencies (altcoins).

The positive correlation between these two rates is also quite evident in the 2022-23 and 2018 interest rate hike cycles.

According to CME’s FedWatch tool, investors expect the Fed to reduce interest rates by another 25 basis points by the end of the year.

lower highs

The BTC dominance rate has recorded lower highs since 2015, a sign of growth in the overall market.

While the volatility over the past two years has been impressive, it still leaves the metric well below the previous peak of 73%. This is likely due to the phenomenal growth of stablecoins, which stand out with a record market capitalization of $172 billion.

SwissOne Capital: “The fact that stablecoin market caps are close to 10 percent of the total market cap explains why bitcoin dominance could peak between current levels and 60 percent (maximum) before a major reversal occurs.”