What Is BTC Dominance?
Bitcoin dominance, also known as BTC dominance, serves as a crucial metric gauging the relative market capitalization of bitcoin in comparison to other cryptocurrencies. This ratio holds significance for numerous crypto investors and traders, as it influences their trading strategies and portfolio arrangements. By analyzing bitcoin dominance, individuals can make informed decisions regarding their cryptocurrency investments.
Introduction
As the cryptocurrency market continues to expand with a multitude of altcoins, bitcoin remains the dominant digital asset in terms of market capitalization. Traders have observed recurring patterns in bitcoin's share of the overall crypto market, leading them to utilize BTC dominance as a guide for their trading behavior. BTC dominance is believed to provide insights into the current market trend.
What Is BTC Dominance?
BTC Dominance and Market Capitalization
Market capitalization represents the total value of a specific asset in circulation. For bitcoin, the market cap is determined by multiplying the current price by the number of BTC mined thus far.
BTC dominance can be calculated using the following formula:
Bitcoin dominance = Bitcoin market cap / Total cryptocurrency market cap
Factors Influencing BTC Dominance
Changing Trends
Prior to the emergence of altcoins, bitcoin dominance often exceeded 90%. However, as altcoins gained traction among users and investors, bitcoin's undivided attention started to wane. Altcoins with greater price volatility and innovative use cases attracted interest, causing bitcoin to lose some of its dominance. Altcoins involved in sectors like gaming, art, and decentralized finance expanded beyond the scope of bitcoin's original purpose. Depending on the prevailing trend, specific types of crypto projects may garner more attention and trading activity, thereby affecting BTC dominance. For instance, the surge in NFTs might have contributed to a slight decrease in BTC dominance in favor of NFT-related tokens.
Market Conditions
Over time, bitcoin has established itself as a relatively stable crypto asset. Traders seeking more significant price swings and associated profit opportunities have turned to newer altcoins. This inclination towards riskier assets can impact bitcoin dominance, as funds flow into these altcoins irrespective of their sector. In favorable market conditions, traders may also choose to invest in more volatile altcoins than BTC, further influencing BTC dominance.
Bull or Bear Market
The rise in stablecoin popularity has exerted sustained pressure on BTC dominance. During bear markets or periods of high volatility, stablecoins offer a means to protect investors' funds amid falling prices. These altcoins are designed to maintain value equivalent to more stable assets like fiat currencies or commodities. Investors often use stablecoins to secure profits without converting their crypto holdings into fiat. Consequently, when funds shift from BTC to stablecoins, BTC dominance can decline. Conversely, in a bull market, traders may move value from stablecoins to more volatile assets like bitcoin. However, traders might also opt for riskier altcoins, amplifying the effects of favorable market conditions on BTC dominance.
On-Ramping via Stablecoins
Stablecoins provide a convenient gateway to access a wide variety of cryptocurrencies compared to using fiat currency. Fiat-to-crypto exchanges, known as gateway exchanges, typically offer popular cryptocurrencies and stablecoins but impose restrictions. Conversely, crypto-to-crypto exchanges offer a broader range of tradable cryptocurrencies paired with select stablecoins. Consequently, individuals seeking specific cryptocurrencies may enter the market via stablecoins. If a significant influx of new funds occurs through stablecoins instead of bitcoin, the total value of the crypto market increases, diluting BTC dominance.
Emergence of New Coins
The introduction of new coins can swiftly gain popularity, potentially diminishing BTC dominance. As bitcoin competes with every other cryptocurrency in the market, the simultaneous emergence of multiple popular altcoins can impact its dominance. However, there is a possibility that these altcoins may lose popularity once the initial hype subsides. In such cases, if funds are reallocated from these altcoins to BTC or withdrawn from the crypto market entirely, BTC dominance may rise again.
Using BTC Dominance in Trading
Wyckoff Method
The Wyckoff Method, developed in the 1930s, comprises principles designed for traders and investors in traditional financial markets. Some of these principles, such as the law of cause and effect, can be applied when using BTC dominance to identify profit opportunities.
Traders and investors utilize the Wyckoff Method to identify market trends, estimate the likelihood of trend reversals, and time trades. The method organizes trading behavior into four phases: accumulation, markup, distribution, and markdown. Understanding where and when funds flow becomes crucial for traders who rely on timing the market to make informed decisions. Diversified traders often use this approach to identify stronger trends.
Using BTC Dominance to Spot Altcoin Season
With the increasing number of altcoins, BTC dominance naturally dilutes. Some altcoins have gained substantial popularity in recent years, briefly surpassing bitcoin's total market capitalization. Periods where altcoins consistently outperform bitcoin are referred to as "altcoin season" or "alt season." Following Wyckoff Method principles, the movement of funds from bitcoin to altcoins occurs cyclically during these seasons. Traders who engage in both bitcoin and altcoin trading monitor BTC dominance to adjust their portfolios accordingly.
Using BTC Dominance with Current Bitcoin Price
Monitoring bitcoin price alongside BTC dominance can aid in making trading decisions. Although not definitive indicators, various combinations of BTC price and dominance can suggest potential outcomes:
- Rising BTC price and dominance may signal a potential bitcoin bull market.
- Rising BTC price but falling BTC dominance may indicate a potential altcoin bull market.
- Falling BTC price but rising BTC dominance may suggest a potential altcoin bear market.
- Falling BTC price and dominance may signal a potential bear trend for the entire crypto market.
While these factors do not guarantee a bull or bear market, historical observations highlight a correlation.
Closing Thoughts
BTC dominance serves as a tool to understand changing market cycles. Traders use it to adjust their trading strategies and manage diversified portfolios. It is important to note that BTC dominance does not guarantee the performance of bitcoin or any other cryptocurrency. Instead, it acts as a guide to help traders plan their trading approach.
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Editor: James Felix
Source: https://academy.binance.com/en/articles/what-is-btc-dominance
