Bitcoin’s Market Dominance Faces Challenges as On-Chain Activity Shifts Towards Ethereum

Bitcoin (BTC) has long held a dominant position in the cryptocurrency market for years.

However, recent trends show a shift in the landscape as Bitcoin’s market dominance faces increasing pressure from Ethereum (ETH) and other Layer 1 networks. While Bitcoin’s dominance in terms of market capitalization has been steadily increasing since 2022, when measured by active users and on-chain activity, the leading cryptocurrency is seeing its market share decline. This shift has raised a lot of important questions about the future role of the cryptocurrency king in the crypto ecosystem as its price faces volatility.

Even with this drop in its proportion of users, Bitcoin keeps holding sway in the market. It commands a huge slice of not just the Bitcoin market but of the overall cryptocurrency market, as this data recently presented at a Bitcoin conference makes clear. If you add up all the various prices that exchanges paid for Bitcoin over a certain time and then calculate the average price (this is what the Bitwise report does), you end up with roughly $83,000 as the current average price for a Bitcoin.

Bitcoin is under heavy selling pressure, and this is being seen most directly in some of its key on-chain metrics. The net value of Bitcoin deposits to exchanges hit over $770 million yesterday, showing signs of panic as Bitcoin revisited the sub-$80,000 price level. When we see a surge in exchange deposits, it’s often a key indicator of fear in the market, as investors tend to move their assets onto exchanges when they anticipate a further price decline. These exchange deposit numbers are significant, and they paint a scary picture.

IntoTheBlock provides on-chain information for Bitcoin. This information highlights two important support prices for Bitcoin. The first price is at $79,270, which is considered a short-term support price and one that Bitcoin recently hit again, suggesting this is where buyers might enter the market again to stabilize the price. The second support price—much lower and one that seems almost fantastical in light of current prices—is at $69,450. This support price is watched because, should it be hit, there is a pretty good chance that a number of buyers will enter the market, again stabilizing the price.

These two levels of support are key technical points where the price of Bitcoin could either stabilize or correct further. But the market sentiment around Bitcoin is what mostly controls its price—up or down. And how does the market feel about Bitcoin right now? Not very good. It’s a bloodbath out there, and the price of Bitcoin is getting smashed. The Paxos Trust company, which issues the stablecoin known as Binance USD (BUSD), is under investigation by the New York Department of Financial Services. According to Paxos, the NYDFS has ordered it to stop issuing BUSD. And that could have some serious repercussions for the price of Bitcoin.

One more development that has contributed to the recent market upheaval is the outflow from Bitcoin spot exchange-traded funds (ETFs) that just won’t quit. As of our press time, the Bitcoin spot ETFs (more on these below) had suffered a total net outflow of $371 million for the week ending March 11. That was the seventh consecutive week of negative net flows for the funds. This is very much not what you want to see if you’re the kind of person who thinks Bitcoin is about to go on one of its famous runs.

The outflows from Bitcoin ETFs indicate a short-term dip in confidence from institutional investors. These outflows and the uptick in exchange deposits raise two big questions. Why are so many assets leaving these apparently safe havens? And what could it mean for Bitcoin’s price? If the ETFs are seeing outflows, and the deposits in exchanges are going up, that seems to be setting up for some volatility.

Even though Bitcoin’s price is under pressure, it is worth noting that its market dominance—when compared to the other cryptocurrencies—looks relatively good. But overall market behavior, along with a shift in activity toward Ethereum and other Layer 1 projects, indicates that Bitcoin’s leadership in the crypto ecosystem is being challenged in some new ways.

Even as the market cap of Bitcoin continues to rise, the world is starting to take notice of Ethereum and Layer 1 networks like Solana. Ethereum now sits firmly in second place in the rankings of actual usage of different blockchains, with active users and increasing on-chain activity leveraging its smart contract functionality.

Layer 2 networks like those from StarkWare are enhancing Ethereum’s capacities, pushing its ecosystem even further ahead of Bitcoin in terms of the actual usage of different networks for the kinds of things that people do. Those “things” range from engage with actual DApps (decentralized applications), transact via DeFi (decentralized finance), push NFTs (non-fungible tokens), and do any number of other innovative “blockchainy” things.

In fact, the only thing that seems to be holding Bitcoin back from losing too much ground to Ethereum is the growing market for different kinds of virtual currency. Either way, those two networks (and Layer 1 networks like Solana) are the big competitors to each other.

As Ethereum moves forward in developing its ecosystem, Bitcoin is finding it more difficult to hold on to its lead in not only the active-user category but also in on-chain transactions. Most people on the planet know what Bitcoin is; it is by far the most recognized and valuable cryptocurrency. But the rapid growth, development, and adoption of Ethereum could prove to be a long-term erosion threat to Bitcoin, especially as demand for decentralized applications continues to grow.

To sum up, the recent price problems of Bitcoin and the increasing outflows from Bitcoin spot ETFs have thrown the asset’s short-term prospects into doubt. For now, we are still talking about a market that is at least somewhat dominated by Bitcoin, but its position as the number 1 cryptocurrency in terms of actual user participation is being seriously challenged by Ethereum and a number of other Layer 1 networks. As much as anything, the next steps for Bitcoin and the next steps for the market as a whole could be signaled by how well it holds up around some key support levels and whether ETF outflows keep gathering steam.

Disclosure: This is not trading or investment advice. Always do your research before buying any cryptocurrency or investing in any services.

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