What is Bitcoin Dominance and How It Influences the Way You Trade
When we talk about cryptocurrency, we cannot forget OG - Bitcoin. Bitcoin has been the most trusted and widely accepted cryptocurrency all across the globe. With its first mover advantage and being this popular among the masses, it’s only natural for Bitcoin to influence the entire crypto market. This influence of Bitcoin on the crypto market is expressed in terms of Bitcoin dominance. Bitcoin dominance is a measure of how much of the crypto market cap is composed of Bitcoin. It is a major indicator helping crypto traders and investors understand vis-a-vis Bitcoin. If BTC dominance rises, the altcoin value, as a whole, drops. If BTC Dominance drops, the altcoins gain value. It is also known as Bitcoin dominance ratio and Bitcoin dominance index.
What is Crypto Market Capitalization?
The term crypto market capitalization refers to the total market value of a particular cryptocurrency. Market capitalization at any moment is calculated by multiplying the price of a cryptocurrency by the total number of coins in circulation in that time frame. As an example, we can compare the total market capitalization of Ethereum with that of Bitcoin. Let’s say that the total number of coins in circulation is: Ethereum = 120 million Bitcoin = 19 million And they are priced at: Ethereum = $2,000Bitcoin = $30,000Then their respective market capitalization will be, Ethereum = 120 million x 2000 = $ 24 btheillion Bitcoin = 19 million x 30,000 = $570 billion(hypothetical figures)
Bitcoin Dominance and Market Capitalization
Bitcoin dominance is the ratio of the total market capitalization of Bitcoin divided by the total market capitalization of the crypto market. As the first and most widely accepted form of cryptocurrency, Bitcoin has the most influence over the entire crypto market. Hence, the total crypto market cap follows the trend set by Bitcoin’s market capitalization.
Source: TradingView
The whole shape and direction of the total crypto market cap follow Bitcoin’s market cap. Bitcoin dominance is so prominent over the entire market that anyone with even a little knowledge of cryptocurrency would consider Bitcoin their first investment choice. Hence, any new investment is bound to increase Bitcoin’s market cap.
Factors Influencing Bitcoin Dominance
As altcoins gained prominence worldwide, Bitcoin dominance, which used to be around 95% at a point in time, fell. In about 2017, when investment in altcoins began to grow, Bitcoin dominance fell to about 35%. The dominance grew steadily to about 70% in the following years as many altcoins ceased their action. A strain on investment in bitcoins occurred when China desisted its bitcoin mining in 2021. Moreover, around this time, negative news surrounding Bitcoin’s energy usage also came to play, and hence, Bitcoin dominance plunged once again.
Source: Trading View
Two factors determine the Bitcoin dominance ratio, and these are namely,
- The market capitalization of Bitcoin
- The total market capitalization of the crypto market as a whole
Market Cap has been discussed in detail previously in the article. Bitcoin’s market cap is subject to fluctuations. Since the supply of coins is steady and won’t be growing much, the major factor influencing the market cap is the price of Bitcoin. If we look at the trends of both the market capitalization and Bitcoin’s price, it can be observed that the market cap follows the price trend of Bitcoin intently. When the price of Bitcoin spikes, so does the market cap. The next factor is altcoin fluctuations in the market. Since the total market cap is the denominator of Bitcoin dominance which is closely influenced by the altcoin fluctuation, it plays a major role in determining the dominance. Over time, altcoins have heavily influenced the crypto market, and as the investment in altcoins is increasing, the value attributed to Bitcoin is being watered down with time. Hence, the proportion of BTC value reduces the total market cap.
Trading Crypto Using BTC Dominance
BTC dominance at any time is an indicator of who has a stronger hold over the market - if investing in bitcoins is beneficial or if altcoin investments have better upsides. The BTC dominance ratio can provide an insight into which currency holds greater potential amongst Bitcoin and altcoins. Once the trend around the BTC dominance ratio is determined, check Bitcoin’s price trends in that particular time frame. After which, a simple methodology can be used to form a strategy.
- If the BTC dominance ratio is in an uptrend and Bitcoin is in an uptrend, buy bitcoin.
- If the BTC dominance ratio is in an uptrend and Bitcoin is in a downtrend, then sell altcoins.
- If the BTC dominance ratio is in a downtrend and Bitcoin is in an uptrend, then buy altcoins.
- If the BTC dominance ratio is in a downtrend, and Bitcoin is in a downtrend, then sell Bitcoin.
Once the strategy has been determined, investors can identify trading opportunities. Another strategy is to trade at extremes. From 2018 to 2021, BTC dominance has been at a maximum of 74% and a minimum of 35%. It is highly unlikely that the ratio will shoot above or drop below these historic highs and lows. Thus, a reversal is at risk when the BTC dominance ratio tends towards these historic highs and lows. Therefore, there is a high certainty for the ratio to fall at an extremely high reading and vice versa. It is extremely rare for the dominance ratio to breach its extremes. Thus, when such a phenomenon occurs, or the ratio reaches near these values, it comes with good trading opportunities. Once you have established what kind of pattern Bitcoin dominance is experiencing, establish your trade flow using this guide :
- When the BTC dominance ratio is at a historic high and Bitcoin is in an uptrend, selling bitcoins will be more beneficial.
- When the BTC dominance ratio is at a historic high and the Bitcoin is in a downtrend, it is an indication to buy altcoins.
- When the BTC dominance ratio is at a historic low and Bitcoin is in an uptrend, it is an indicator to sell altcoins.
- When the BTC dominance ratio is at a historic low and Bitcoin is in a downtrend, buying bitcoins will be more beneficial.
The BTC Dominance ratio can thus help grasp some good trading opportunities and identify potential in both Bitcoin and altcoins.
Reliability of Bitcoin Dominance Indicator
According to experts, one must only be open to investing in crypto if they are okay with losing. This is because crypto markets are complex ecosystems. No single parameter can determine the entire flow of the crypto market, and hence, fixating on a single parameter might lead to losses or inconsistent results. It is a helpful factor, no doubt, but it is only a single parameter in the vast entirety of the crypto market. As altcoins are becoming increasingly popular among the masses, there is a very high possibility that BTC dominance will decline and hit new lows. If such a condition appears, the BTC dominance index will no longer remain an advantageous parameter in determining crypto market trends.
Conclusion
The BTC Dominance Ratio is a highly beneficial and advantageous tool in determining the crypto market trends. This observation can help the trader decide whether and when to buy or sell altcoins or Bitcoin. However, since the crypto market is still in its nascence, it is safe to say that several new altcoins will be introduced, attracting more investors and giving them the edge in investment in the coming future. This might render the BTC dominance ratio useless, but until then, it is an excellent and advantageous parameter that helps in knowing the status and identifying trading opportunities in the crypto market.
Frequently Asked Questions (FAQ)
1. What is Bitcoin dominance ratio?
It is the ratio of Bitcoin market cap to total market capitalization.
2. What is crypto market capitalization?
The total market capitalization is the product of the total number of coins of a particular cryptocurrency in circulation and its market price.
3. How are the Bitcoin dominance index and market cap related?
Market cap is the denominator of the BTC dominance index and is its major determining factor.
4. Is the Bitcoin dominance factor a reliable indicator of the crypto market trends?
If it pertains to the current situation, Yes. However, it should not be the only factor to keep in mind while trading since the crypto market is utterly complex.