Currently, Bitcoin dominance abbreviated as BTC dominance is among the most important indicators in the crypto market. It calculates the Bitcoin market capitalization against the entire crypto market capitalization. A lot of crypto investors and traders apply this in order to change their basic trading tactics and portfolio diversification. BTC dominance analysis can be useful in studying the overall market trend and making the right trading decisions.
What is BTC Dominance?
Bitcoin is the first and largest cryptocurrency by market capitalization. This crypto giant has always played a significant role in the crypto market. BTC dominance refers to Bitcoin’s share of the total cryptocurrency market value. It is calculated using the following formula:
Bitcoin dominance = Bitcoin market cap/ Total cryptocurrency market cap
Market capitalization is the total value of a particular asset. For Bitcoin, it is calculated by multiplying the current price of one Bitcoin by the total number of Bitcoins mined so far.
Factors Influencing BTC Dominance
Changing Trends
To begin with, the Bitcoin share was more than 90% due to the fact that only Bitcoin was widely recognizable. However, as more altcoins (alternative cryptocurrencies) started to be developed, the percentage of Bitcoin began to decline. To what extent do various altcoins have different purpose and utility including DeFi, gaming, and art? For instance, the expansion of Non-Fungible Tokens (NFTs) led to some shift of funds from Bitcoin to NFT-related tokens, which resulted in a decline in BTC’s share.
Bitcoin is rather one of the more stable and reliable forms of the cryptocurrency. Conversely, newer altcoins have large fluctuations between their prices and serve as having high profit for those who trade them. This shifting interest influences Bitcoin dominance because funds are taken to riskier altcoins.
Bull and Bear Markets
Another contributing factor is the emergence of stable coins, which are digital currency assets that are pegged to a stable asset to minimize their volatility in relation with BTC. Stablecoins are cash equivalents which are used by investors to preserve the value of their money particularly during bear market where prices are falling.
This movement also decreases the share of Bitcoin in the total capitalization of cryptocurrencies. On the other hand, in a bull market characterized by rising prices, traders may transfer value from stable coins back to Bitcoin or some other risky asset, thus bolstering the figure for BTC dominance. Butt the exact effect is highly sensitive to the general market setting.
On-Ramping through Stablecoins
Stablecoins serve as an entry point to trading cryptocurrencies since they are linked to real assets. As mentioned before, fiat-to-crypto exchanges, sometimes referred to as gateway exchanges, may offer fewer options in terms of cryptocurrencies. This implies that new funds coming to the market through stablecoins can reduce BTC dominance as the existing BTC supply is not directly impacted.
Arrival of New Coins
When new and popular altcoins are added to the market, the BTC dominance rate can decline rather fast. Bitcoin is against every other cryptocurrency, meaning when several successful altcoins are launched, it can bring bitcoin market share down for a while. But if either of these altcoins’ popularity decreases, the funds might return to Bitcoin and boost Bitcoin’s dominance again.
Using BTC Dominance in Trading
The Wyckoff Method
The Wyckoff Method was originally used in the early 1930s for the traditional financial markets but it can be adopted for the Bitcoin dominance. It is used by traders to determine market direction, establish approximate trend reversals, and time entries/ exits. According to Wyckoff, market behavior is organized into four phases. These phases include acquisition, mark-up, distribution, and markdown. Logically, the more traders know when and where money will be spent, the better their decisions can be.
Spotting Altcoin Season
Bitcoin dominance is known to drop when there are more altcoins in circulation in the market. If altcoins become popular and their total market cap surpasses that of Bitcoin, it is referred to as the “altcoin season.” From the Wyckoff perspective, the strategy of shifting from Bitcoin’s total market cap to altcoins can be predicted.
During altcoin season, traders should pay particular attention to the level of Bitcoin dominance as it usually declines. This enables them to rebalance their portfolios following the improved performance of altcoins in contrast to Bitcoin during this phase.
BTC Dominance and Bitcoin Price
Monitoring Bitcoin price along with BTC dominance can provide additional trading insights. Here are some scenarios:
- If both BTC price and dominance are rising, it might indicate a Bitcoin bull market.
- If BTC price is rising but dominance is declining, it might suggest an altcoin bull market.
- If BTC price is falling but dominance is rising, it might indicate an altcoin bear market.
- If both BTC price and dominance are declining, it might signal a bear trend for the entire crypto market.
While these scenarios are not guarantees, historical trends suggest a correlation between these factors.
Conclusion
BTC dominance is helpful to determine cycles and trends of the cryptocurrency market. It is used by traders and investors to make changes in their trading activities and investment plans respectively. Although it does not predict certain results, BTC dominance can offer essential knowledge for how the trends of the market will change. In addition, it allows traders to adjust their strategies more efficiently.
Frequently Asked Questions
What is Bitcoin Dominance?
Bitcoin dominance, abbreviated as BTC dominance, refers to Bitcoin's share of the total cryptocurrency market capitalization. It is calculated by dividing Bitcoin's market capitalization by the total market capitalization of all cryptocurrencies. This metric helps investors gauge Bitcoin's relative strength compared to altcoins.
Why is Bitcoin Dominance Important?
Bitcoin dominance serves as a barometer for the overall health and direction of the cryptocurrency market. A rising dominance suggests that Bitcoin is outperforming altcoins, often indicating a more conservative or risk-averse market. Conversely, a declining dominance may signal a shift towards altcoins, reflecting a more speculative or bullish market sentiment.
How Can Investors Use Bitcoin Dominance?
Investors monitor Bitcoin dominance to inform their investment strategies. A decreasing dominance might prompt investors to consider diversifying into altcoins, while an increasing dominance could encourage a focus on Bitcoin. However, it's essential to consider other market indicators and conduct thorough research before making investment decisions.
