The cryptocurrency market is highly volatile, making it a potentially risky investment. As a result, traders and investors are increasingly designing different tools and indicators to track market trends in order to make the right trading decisions.
One of these tools is the “Bitcoin Dominance Index.” The Bitcoin Dominance Index helps analyze various market conditions to determine the stronger market trend between Bitcoin and altcoins.
In this article, we will describe Bitcoin dominance, the factors that influence it, and how you can use it to make better trading decisions.
What is Bitcoin Dominance?
Bitcoin dominance, or BTC dominance, is a measure of how much of the total value of all cryptocurrencies is made up of Bitcoin. Its basic principle is that if the dominance of BTC increases, the value of altcoins will decrease. Conversely, if the dominance of BTC declines, the value of altcoins will increase. BTC Dominance is also called the Bitcoin Dominance Index and the Bitcoin Dominance Ratio.
The level of Bitcoin dominance is determined by comparing the total market capitalization of Bitcoin to the total market capitalization of all other cryptocurrencies combined.
The term crypto market cap refers to the total market value of cryptocurrencies. The market value of a cryptocurrency is determined by multiplying the total number of coins in circulation by their current price.
The price of a crypto token is not the only way to determine its value. Investors look at market cap to get a bigger picture and to compare the value of different cryptocurrencies. As a key statistic, market cap can show how much a cryptocurrency’s price can grow and whether it is safe to buy compared to others.
3 Key Factors Affecting BTC Dominance
So how does BTC’s strength compare to other cryptocurrencies? What Affects BTC Dominance?
1. Increase in use of Altcoins
Bitcoin was created to replace fiat currencies and be a common currency for the transfer of value. On the other hand, many altcoins go beyond being an exchange system as they are also used in large projects including gaming, security, art and many more DeFi services. As a result, Bitcoin’s market dominance is waning as altcoins become more widespread.
2. Stablecoin usage increase
We all know that the cryptocurrency market is volatile. To deal with this, many have started looking at stablecoins, a type of altcoin. A stablecoin is a cryptocurrency whose value is tied to another asset class to remain stable, such as fiat currency, gold, etc.
With stablecoins, crypto investors don’t always have to convert their money into fiat currencies to lock in their profits. Instead, they can convert it to stablecoins. Moving your funds from the volatile Bitcoin to stablecoins reduces BTC dominance.
3. Launch of new cryptocurrencies
Many more coins are introduced into the market, attracting more users and investors. Some of these coins attract investors and developers in a short period of time. In its effort to gain market relevance, the project team is conducting activities to make the altcoin more valuable. Some altcoins are hyped up on social media, causing investors to jump into the price pump for the opportunity to make a quick buck. These activities also reduce Bitcoin’s dominance.
There are many ways to make money faster with altcoins than with Bitcoin. Bitcoin’s price is already high and compared to other cryptocurrencies it is more stable. Many people invest in altcoins to profit from more volatile and dramatic market movements.
2 ways to use BTC dominance in trading
Is it possible to use BTC dominance in your crypto traders?
Using BTC Dominance to Determine Altcoin Season and Other Price Trends
The term “altcoin season” describes a period when the price of alternative cryptocurrencies rises compared to Bitcoin for several weeks or months. This event usually occurs when the price of Bitcoin stops after a significant increase and investors transfer their profits to other coins, starting a new bull market for altcoins.
You can spot an altcoin season using the TradingView Bitcoin Dominance Index. The index compares the market value of Bitcoin with that of other cryptocurrencies. The result can be used to decide whether it is better to invest in Bitcoin or whether altcoins have a stronger trend.
The image above shows that in 2018 and 2022 BTC’s market share dropped a lot. This long fall in BTC’s dominance could indicate an altcoin season, which could be a good time to put more money into altcoins.
Using BTC Dominance to Trade Extreme Markets
Between 2017 and 2021, BTC’s market share went as high as 75% and as low as 35%. At the time of writing, it is less likely that the BTC market cap will go above 75% anytime soon. However, when the ratio approaches 75%, it may be time to expect a Bitcoin price drop. Also, a ratio near or below 35% shows that BTC’s dominance is weakening, and it could also mean that a price movement in the opposite direction is imminent. Of course, this is just speculation – you have to make your own decisions regarding your crypto investments!
BTC dominance may not often reach these highs. But when it reaches them, it will offer investors good trading opportunities.
BTC dominance cannot be used as a standalone indicator
The BTC Dominance is a great way to determine the market trend as it shows how strong a Bitcoin trend is compared to other cryptocurrencies. It can give you more information about the changing markets and when to adjust your strategies. However, this strategy does not guarantee that Bitcoin and other altcoins will move as predicted. It should only be used as a guide, along with other indicators and strategies.
Furthermore, more altcoins will be created and the Bitcoin dominance ratio may become irrelevant as they gain market share. But until that happens, it will still be a good way to spot some market trends and identify trading opportunities.
This is not financial advice. If you are interested in any type of investment, you should consult a licensed financial advisor who can provide you with the best advice based on your needs and risk appetite.
