What Is Bitcoin Dominance?
As a metric, Bitcoin or BTC dominance compares the market capitalization of Bitcoin to that of all other cryptocurrencies. Investors and traders may use this measurement to help adjust their portfolio structures and trading strategies.
Basics
Despite the proliferation of alternative cryptocurrencies, bitcoin has maintained its position as the largest digital asset by market capitalization. Market observers have noticed that changes in the value of bitcoin's share in the overall cryptocurrency market often exhibit recurring patterns. As a result, some traders have incorporated BTC dominance as a reference point for their trading strategies. Specifically, BTC dominance is considered an indicator of the general market trend.
BTC Dominance and Market Capitalization
Calculating the market capitalization of an asset means determining the total value of that asset in circulation. In the case of bitcoin, the market cap is obtained by multiplying the current price of a bitcoin with the number of bitcoins that have been mined to date.
To compute BTC dominance, use the following formula:
BTC dominance = Bitcoin market cap / Total cryptocurrency market cap
What Affects the BTC Dominance?
Trends
Bitcoin dominance used to be above 90% before altcoins gained popularity. As more attention was given to other cryptocurrencies, bitcoin's market share decreased. Altcoins are involved in various sectors, such as gaming, art, and decentralized finance, and this diversity may cause changes in the market. NFT-related tokens may receive more attention during an NFT boom, leading to a drop in BTC dominance.
Bitcoin is considered a stable asset, while newer altcoins offer more dramatic price swings and associated profit opportunities, leading to investors putting their funds into riskier assets. The sectors these altcoins represent may not be as significant as the potential profits. The current trend affects the interest and trading around specific crypto projects.
Different Market Sentiment
In the past few years, the popularity of stablecoins has increased significantly. This trend has put pressure on BTC dominance, particularly during market downturns and periods of volatility. Stablecoins are altcoins designed to maintain a value pegged to an asset with a more stable price, such as a fiat currency or commodity. They are often used by crypto investors and traders to protect their funds in times of falling prices or to lock in profits without converting their crypto to fiat. When investors move funds from the BTC market to stablecoins, BTC dominance can decrease.
Conversely, during bullish market conditions, traders may be incentivized to move value from stablecoins to more volatile assets, such as bitcoin, which can provide more trading opportunities. However, traders may also take on greater risk by investing in even more volatile altcoins, potentially reducing bitcoin dominance. Therefore, the impact of favorable market conditions on bitcoin dominance is context-dependent.
On-Ramping via Stablecoins
Compared to fiat currency, stablecoins provide an easy means of accessing various cryptocurrencies. While gateway exchanges only offer popular cryptocurrencies and stablecoins, crypto-to-crypto exchanges offer a more extensive selection of cryptocurrencies that can be traded with select stablecoins. As a result, stablecoins can serve as a gateway for traders interested in specific cryptocurrencies. If new funds enter the market through stablecoins instead of bitcoin, the overall value of the crypto market can increase, resulting in a decrease in BTC dominance.
The Emergence of New Coins
The introduction of new coins in the market can rapidly reduce BTC dominance. As bitcoin competes with all other cryptocurrencies, the sudden popularity of several new altcoins can impact its market share. Nevertheless, these altcoins may fall out of favor when the hype subsides. If this happens, funds may flow from these altcoins back to BTC or out of the crypto market altogether, which could result in BTC dominance increasing once more.
BTC Dominance in Trading
Wyckoff Method
The Wyckoff Method, which was developed in the 1930s for traditional financial markets, can also be used by traders and investors looking to profit from BTC dominance. It is based on principles such as the law of cause and effect, which can help identify trends, forecast trend reversals, and time trades.
The Wyckoff Method outlines four phases of trading behavior: Accumulation, markup, distribution, and markdown. For traders who depend on timing the market to make informed decisions, understanding where and when funds are flowing can be crucial.
Many diversified traders and investors use the Wyckoff Method to choose the stronger trend. There are several scenarios where the Wyckoff Method can be useful when applied to BTC dominance.
Determining Altcoin Season
Bitcoin's dominance is being diluted due to the growing number of altcoins in the market. Altcoins have become more popular in recent years, and the total market capitalization of all altcoins has at times surpassed that of bitcoin. "Altcoin season" or "alt season" refers to periods when altcoins steadily outperform bitcoin. According to the Wyckoff Method, the movement of funds from bitcoin to altcoins is cyclical.
During an altcoin season, altcoins usually outperform bitcoin, which may weaken bitcoin's dominance. Traders who deal in both bitcoin and altcoins may track bitcoin dominance to adjust their portfolios accordingly. The Wyckoff Method applies to this market scenario, and traders and investors use it to identify market trends, estimate the probability of trend reversals, and time trades. By recognizing which phase the market is in, traders can make informed decisions about buying or selling bitcoin and altcoins.
Using BTC Dominance With Current Bitcoin Price
Monitoring both bitcoin price and bitcoin dominance can be helpful for some traders when making trading decisions. While not foolproof, there are some potential outcomes that traders may consider when looking at combinations of BTC price and dominance.
Observing changes in the price and dominance of BTC may provide insights into potential trends in the crypto market. A rising BTC price and dominance may indicate a bitcoin bull market. When the BTC price is rising but dominance is falling, it may indicate an altcoin bull market. In contrast, a falling BTC price but rising dominance may indicate an altcoin bear market. Finally, both falling BTC price and dominance may indicate a bear trend for the entire crypto market. However, it's important to note that these factors do not guarantee market performance, but they are historically correlated with potential market trends.
Conclusion
To help traders adjust their trading strategies and manage their diversified portfolios, BTC dominance provides insight into how market cycles are changing. While it does not guarantee the performance of any cryptocurrency, it serves as a guide to assist traders in planning their trading approach.