When it comes to cryptocurrency, one cannot help but mention Bitcoin. Bitcoin has become the most trusted and globally accepted form of cryptocurrency. With its first-mover advantage and widespread popularity, Bitcoin’s impact on the entire cryptocurrency market is inevitable. This influence of Bitcoin on the cryptocurrency market is represented by Bitcoin’s dominance – also referred to as Bitcoin Dominance.
Bitcoin Dominance is a metric that compares the market capitalization of Bitcoin to the entire cryptocurrency market cap. It is a key indicator that helps cryptocurrency investors and traders to understand the standing of Bitcoin as well as other altcoins. If Bitcoin Dominance increases, generally, the value of altcoins tends to decrease. Conversely, if BTC Dominance decreases, altcoins are likely to increase in value.
But to understand in detail what Bitcoin Dominance is, and how to apply BTC Dominance in analyzing the crypto market, let’s delve deeper into the content of the article below.
Contents
What is Bitcoin Dominance?
What Is Cryptocurrency Market Capitalization?
Before understanding what Bitcoin Dominance is, let’s first explore the concept of cryptocurrency market capitalization – as these two terms are closely related.
Cryptocurrency market capitalization refers to the total market value of a specific cryptocurrency. Market capitalization at any given moment is calculated by multiplying the price of the cryptocurrency by the total number of coins currently in circulation during that timeframe.
For example, the total market capitalization of Ethereum can be compared to that of Bitcoin.
Assume the total circulating supply is:
- Ethereum = 120 million
- Bitcoin = 19 million
And their respective prices are:
- Ethereum (ETH) = $2,000
- Bitcoin (BTC) = $30,000
Then, the market capitalizations would be:
- Ethereum = 120 million x $2,000 = $240 billion
- Bitcoin = 19 million x $30,000 = $570 billion
What Is Bitcoin Dominance?
Bitcoin Dominance (BTC.D), or the Bitcoin Dominance Index, is the ratio between the total market capitalization of Bitcoin and the total market cap of the entire cryptocurrency market.
As the first and most widely accepted form of cryptocurrency, Bitcoin has the largest influence on the entire cryptocurrency market. That’s why the total market capitalization of cryptocurrencies follows the trend set by Bitcoin’s market cap.
You can easily look up Bitcoin Dominance data on various websites. For instance, on Tradingview, you can type BTC.D or Bitcoin Dominance.
Or if you use Coinmarketcap.com, you’ll see Bitcoin Dominance and Ethereum Dominance displayed prominently at the top part of the page:
Bitcoin’s dominance is so prominent across the entire market that anyone with even a slight knowledge of cryptocurrency considers Bitcoin their first investment choice. Thus, any new investment can potentially increase the market cap of Bitcoin.
Correlation Between Bitcoin Dominance and Altcoins
(1) Before altcoins became famous worldwide, Bitcoin’s dominance – which once stood at around 95% at a point in time – began to diminish as Altcoins started to emerge.
(2) Around 2017, as investment in Altcoins started to flourish, Bitcoin’s dominance dropped to about 35%.
(3) Starting from 2018, Bitcoin Dominance began to rise again to nearly 70% as many altcoin projects failed to sustain operations.
(4) Tensions for Bitcoin occurred when China banned bitcoin mining in 2021. Furthermore, during this period, negative news regarding Bitcoin’s energy usage also surfaced, thus Bitcoin Dominance once again reduced.
Factors Affecting Bitcoin Dominance
The two factors that determine Bitcoin’s dominance – Bitcoin Dominance, are surely guessable.
- Bitcoin’s market capitalization
- The total market capitalization of the entire cryptocurrency market
Market capitalization has been previously mentioned. Bitcoin’s market cap can fluctuate. As Bitcoin’s supply is stable and will not increase significantly, the primary factor affecting market cap is the price of Bitcoin. If we look at the trend of both market cap and the price of Bitcoin, we can notice that the market cap closely follows the price trend of Bitcoin. When the price of Bitcoin experiences a sudden increase, so does the market cap.
The next factor is the volatility of altcoins in the market. Since the total market cap is the denominator for Bitcoin’s dominance, which is closely affected by the volatility of altcoins, it plays a significant role in determining dominance. Over time, altcoins have significantly impacted the cryptocurrency market and as the investment in altcoins continues to rise, the value attributed to Bitcoin gradually decreases over time. Therefore, BTC’s share in market value decreases the total market capitalization.
How to Trade with Bitcoin Dominance
Bitcoin Dominance at any given time is an indicator of whether Bitcoin or Altcoins are held more – and from there, it can be determined whether it’s better to invest in Bitcoin or Altcoins.
When the downtrend of Bitcoin Dominance is established, check Bitcoin’s price trend during that period. Then, trade according to the following principles:
- If Bitcoin Dominance is in an upward trend and Bitcoin’s price is in an upward trend, buy Bitcoin.
- If Bitcoin Dominance is in an upward trend and Bitcoin’s price is in a downward trend, then sell altcoins.
- If Bitcoin Dominance is in a downward trend and Bitcoin’s price is in an upward trend, then buy altcoins.
- If Bitcoin Dominance is in a downward trend and Bitcoin’s price is in a downward trend, then sell Bitcoin.
Or more broadly, you can trade according to the guide in the table below:
Another strategy is based on the signal of Bitcoin Dominance at peak or trough levels. From 2018 to 2021, Bitcoin Dominance was at a maximum of 74% and a minimum of 35%. It is very unlikely for this ratio to rise above these highs or fall below these lows. Therefore, a high chance of a reversal is very likely.
Based on the peaks/troughs, set up your trading strategy using this guide:
- When BTC’s dominance ratio is at historic highs and Bitcoin’s price is in an upward trend, selling bitcoin may be more advantageous.
- When BTC’s dominance ratio is at historic highs and Bitcoin’s price is in a downward trend, it is a sign to buy altcoins.
- When BTC’s dominance ratio is at historic lows and Bitcoin’s price is in an upward trend, it is an indicator to sell altcoins.
- When BTC’s dominance ratio is at historic lows and Bitcoin’s price is in a downward trend, buying bitcoin may be more advantageous.
Is the Bitcoin Dominance Indicator Truly Reliable?
You’ve learned what Bitcoin Dominance is, but now a question arises: is BTC.D truly accurate?
In fact, not just in the cryptocurrency market, but any financial market is equally complex and unpredictable. Therefore, it’s impossible to predict the trend of the entire market using only the Bitcoin Dominance indicator. You need to combine BTC Dominance with other various indicators like support-resistance lines, trendlines, MA, etc.
However, one thing we must acknowledge is that Bitcoin Dominance is one of the most useful – if not the only – metric for the entire cryptocurrency market.
As altcoins become more popular, it is highly likely that BTC’s dominance will decline and hit new lows. If such a condition appears, the BTC dominance index will no longer be a beneficial parameter in determining the trend of the cryptocurrency market. However, it may take a long time for this to happen.
IN SUMMARY:
The Bitcoin Dominance ratio is a beneficial tool in determining the trend of the cryptocurrency market. Observing this metric can help you decide where and when to buy or sell altcoins or Bitcoin.
However, as the cryptocurrency market is still in its infancy, it’s possible to say that there will be new altcoins that will be introduced, attracting more investors and providing them with investment advantages in the future. This might render Bitcoin Dominance useless, but until then, it remains an excellent and beneficial metric for understanding the market state and identifying trading opportunities in the cryptocurrency market.
