As the number of cryptocurrencies continues to grow rapidly, traders are always on the lookout for new tools and indicators to analyse the market.
One popular indicator used for this purpose is the Bitcoin (BTC) dominance ratio. This ratio helps identify trends in market.
- The Bitcoin dominance ratio compares Bitcoin’s market cap to the total market cap of all cryptocurrencies.
- Crypto traders use Bitcoin dominance as a metric to gauge the market, identify potential trends and trading opportunities, and to better understand the altcoin market.
- Bitcoin’s dominance fluctuates over time, providing traders with insights to make market positioning decisions.
- It’s important to note that Bitcoin’s market cap dominance does not indicate its actual value or imply a sudden inflow of funds into the market.
- The increase or decrease in Bitcoin dominance is neither inherently good nor bad, but rather serves as a tool to gain a better perspective on the evolving crypto space.
What Is Bitcoin Dominance?
Bitcoin dominance is quite simply the ratio between the market cap of Bitcoin to the market cap of the entire cryptocurrency market.
When we compare this ratio to the price trend of Bitcoin itself, we can learn more about opportunities the current market environment offers.
How Is Bitcoin Dominance Calculated?
Bitcoin dominance can be calculated by taking Bitcoin’s market cap divided by the entire cryptocurrency market cap, thereby giving a percentage value.
Bitcoin Market Cap Chart
Global Crypto Market Cap Chart
At the time of writing; the global crypto market cap is $1.18T and Bitcoin’s market cap sits at $595B. This is indicated in the above two CoinMarketCap charts.
To calculate Bitcoin dominance in one merely divides Bitcoin’s market cap ($595B) by the Total Crypto market cap ($1.18T) to come to a Bitcoin dominance ratio of 50.37%.
Factors That Influence Bitcoin Dominance
Altcoin Performance and Introduction of New Coins
Since Ethereum launched in 2015, thousands of other altcoins and tokens have been created. Prior to this time, Bitcoin was the only major digital currency, so it enjoyed the entire market share.
However, with the addition of more altcoins, the dominance of Bitcoin has shrunk significantly, especially as these alternative crypto-assets increase in adoption and price.
Market Volatility and Stablecoin Popularity
While BTC is one of the most popular cryptocurrencies, its inherent price volatility means investors prefer to move their funds away from Bitcoin during downturns.
These players turn to stablecoins en masse. Stablecoins like Tether (USDT) have their values pegged to real-world assets like the USD, gold and other assets. Because of their stability, crypto-assets like Tether, USD Coin (USDC), and Binance USD (BUSD) have grown in popularity.
Risk-averse investors prefer to use these stablecoins as a store of value during periods of extreme volatility. Investors tend to do this since price swings hardly impact the price of stablecoins. Typically during periods of high-voltility — Bitcoin dominance decreases and ‘stablecoin dominance’ increases.
Market Conditions: Bull or Bear
Bitcoin dominance tends to decrease during bull markets because users are generally less risk-averse and more speculative. This encourages them to deploy their capital into riskier altcoins to capture profits from the wild upward price movements.
How to Trade Crypto Using BTC Dominance
By understanding the ratio between Bitcoin and altcoins, you can identify which category has a stronger trend in order to look for trading opportunities.
Strategy 1: Identifying Altcoin Season
Altcoin Season describes a period when the price of altcoins increases in comparison to that of Bitcoin. The ‘Alt Season’ typically follows after Bitcoin has experienced a significant increase in price. Investors tend to look towards diverting their Bitcoin profits to other crypto projects — which in turn kick-starts the ‘Altcoin Season’.
By comparing the Bitcoi dominance ratio against the price of Bitcoin one can make assumptions about market sentiment.
Strategy 2: Trading the Extremities in Bitcoin Dominance
Another popular strategy that some have employed in the past is to trade the extremities of Bitcoin dominance. When Bitcoin dominance inches towards 75% this might be an indication that Bitcoin’s price will fall soon. On the other hand — when Bitcoin dominance reaches historical lows (i.e. the 25% region) then there is an expectation for Bitcoin to move to the upside. Timing market tops and bottoms using this ratio should be done with extreme caution.
Conclusion
Bitcoin dominance is one of the most populart crypto trading analysis tools among investors. It can be a viable tool to identify the market trends since it reflects BTC’s strength relative to the broader crypto market. It also provides useful insights into changing market conditions and when to adjust trading strategies. However, like other market data and trends, it does not guarantee that Bitcoin and other altcoins will react in a certain manor. Instead, the Bitcoin dominance index should be used as a guide alongside other market indicators.
