The Calculation and the Significance of Bitcoin Dominance

[TL; DR]
We obtain the bitcoin dominance index by dividing the bitcoin market capitalization by the total crypto market capitalization.
In 2013, the bitcoin dominance index was above 90% because there were still very few altcoins.
An increase in the number of altcoins has resulted in a decrease in the bitcoin dominance index.
It is difficult to measure the bitcoin dominance index because some BTCs lie idle in wallets and other people have lost their private keys and cannot recover some of it.

Keywords: bitcoin dominance, altcoins, market capitalization, uptrend, downtrend, investment, trading
Despite that bitcoin was the first cryptocurrency there are thousands of tokens on the market now. However, bitcoin remains the number one cryptocurrency, based on market capitalization. As a result of its popularity many traders assess the performance of the crypto market through observing its dynamics. This is the reason why many traders use bitcoin dominance to predict the market direction. This article will explore the concept of bitcoin dominance and its significance to investors.


What is bitcoin dominance?

---

bitcoin dominance is the ratio of bitcoin market capitalization to the total market capitalization of all the altcoins. Some analysts believe that the behavior of most altcoins follow the trend of bitcoin. This is because bitcoin has many followers and investors. If the market has an appetite to purchase bitcoin its market capitalization increases. If there is risk aversion in the market, market capitalization of bitcoin and that of many cryptocurrencies fall. However, the market capitalization of bitcoin does not grow in direct proportion to that of altcoins. In general, the behavior of most cryptocurrencies follow that of bitcoin

We obtain bitcoin dominance by dividing the market capitalization of bitcoin by the total crypto market capitalization.



Significance of bitcoin dominance

---

bitcoin dominance can be high or low, sending clear signals to traders and investors on how the market is behaving. When we say the bitcoin dominance is high it means that bitcoin market capitalization is relatively higher than that of altcoins and vice versa. Similarly, when bitcoin dominance increases it means that the price of bitcoin is rising at a higher rate than that of altcoins. Crypto experts have observed that the value of bitcoin rises at a faster rate than that of altcoins during a bullish market. In contrast, during a downtrend or bearish market the price of bitcoin drops faster than that of most altcoins.


When bitcoin dominance is low it means that the market capitalization of altcoins is relatively higher than that of bitcoin. This may take place if the price of bitcoin is falling faster than that of altcoins during a downtrend. Alternatively, this is because the average price of altcoins is rising at a faster rate than that of BTC.


Factors influencing bitcoin dominance

---

There are several factors that influence bitcoin dominance. During the early years of cryptocurrencies bitcoin dominance was always above 90%. However, over the years many altcoins came on the market resulting in lower bitcoin dominance than before. The reason is that some emerging crypto projects introduced new products such as staking, lending and liquidity provision which drew a fraction of bitcoin’s fanatics. For example, many decentralized applications that exist on Ethereum and have lured many users from BTC. However, on the way some crypto projects closed down resulting in the bitcoin dominance to rise again.


Using BTC dominance when investing and trading

---

Unquestionably, many investors use bitcoin dominance when making investment and trading decisions. Generally, altcoins perform better during the altcoin season than during any other time. The altcoin season refers to the time when altcoins perform better than bitcoin. Since the position of bitcoin on the market weakens during that season, investors adjust their crypto portfolios accordingly.

The bitcoin dominance can help traders to make quality trading decisions. We will analyze the possible strategies investors and traders can use during different scenarios.

Scenario 1: Rising bitcoin price amid falling bitcoin dominance
If the bitcoin dominance falls when its price is rising, it means that we are in a bullish market where altcoins are performing better than bitcoin. During this situation, investors and traders should buy altcoins. In a way that also signifies that bitcoin may get into a bull run in the near future.


Scenario 2: Falling bitcoin price amid falling bitcoin dominance
When both the bitcoin dominance and price fall the market is bearish. Likewise, the prices of altcoins are most likely to fall and the whole market gets into bear run. In this case, the traders may cash out or purchase bitcoin during the dip.

Scenario 3: Rising bitcoin dominance amid rising bitcoin price
When both the bitcoin dominance and price are rising, bitcoin will be outperforming the altcoins. In this case, there is a positive market sentiment for BTC, attracting investors to purchase more of it.

Scenario 4: Rising bitcoin dominance and falling bitcoin price
When bitcoin dominance is rising amid falling BTC price, it means that altcoins are performing better than BTC. This is a sign that the altcoin market may become bearish soon. As such, the investors should hold their BTC and sell the altcoins.

Also, traders should change their strategies when the bitcoin dominance is close to the historic levels. How do we know the historic levels? Well, these have been established between 2018 and 2019. The maximum bitcoin dominance index was 74% and the lowest was 35%. Currently, these are the two extremes which still guide us.

If the bitcoin dominance index reaches the historic high during an uptrend, it is best time for traders to sell BTC since a price reversal is likely to occur. If the bitcoin dominance index is close to the historic high during a downtrend it is an opportune moment to purchase altcoins. When the BTC dominance index is near the historic low during an uptrend, it is time to purchase altcoins. If the BTC dominance index is close to the historic low level during a downtrend, traders should buy bitcoin.



Advantage

---

The bitcoin dominance index is a useful indicator for analyzing the market trend. However, it is important to use it alongside other indicators. This is because there is no magic indicator in the crypto trading market.

Since BTC is the current number one cryptocurrency, investors track it as it generates important signals during different market situations.


Disadvantages

---

The cryptocurrency market is very complex and the bitcoin dominance index may result in inconclusive and inconsistent results. Worse still, traders who depend solely on it, as a source of signals, may experience losses.

If the number of altcoins continues to increase, the bitcoin dominance index may keep on falling. And once that happens, there will be no historical data to rely on.

Some crypto experts argue that it is impossible to calculate the exact bitcoin dominance index because some BTC are idle in different wallets or other people may never access them after losing their private keys.


Conclusion

---

The bitcoin dominance index is one of the most useful metrics in the crypto space. If used properly, this index helps to identify the selling and buying points of both BTC and altcoins. As a reminder, bitcoin dominance is the ratio of BTC market capitalization to that of altcoins. Generally, when the bitcoin dominance rises, there is depreciation of altcoins. If bitcoin dominance falls, altcoins appreciate in value. Keep it in mind that bitcoin dominance fluctuates depending on the market conditions. In response, investors need to recraft their investment strategies and come up with suitable portfolios.






Author: Mashell C., Gate.io Researcher
This article represents only the views of the researcher and does not constitute any investment suggestions.
Gate.io reserves all rights to this article. Reposting of the article will be permitted provided Gate.io is referenced. In all cases, legal action will be taken due to copyright infringement.