What Is Bitcoin Dominance (BTCD) and How to Use BTCD in Trading
Bitcoin dominance, BTC dominance or just BTCD is used to measure the ratio between Bitcoin’s market cap and the market cap of the entire cryptocurrency market. Traders have found ways to use this metric to predict bull markets, altcoin seasons and bitcoin rallies well before they started.
What Factors Influence BTC Dominance?
As mentioned earlier, Bitcoin’s market cap used to be over 90 percent of the entire crypto market. As more altcoins entered the space, Bitcoin’s influence on the market naturally decreased, but is still significant today. What other factors influence Bitcoin’s dominance?
If we look at the calculation of Bitcoin’s dominance, there are two main components: the market cap of Bitcoin, and the market cap of altcoins.
Bitcoin’s Fluctuation in Price
Because the number of Bitcoins in existence grows slowly, BTC market cap is mostly influenced by its price action. The easiest way for Bitcoin’s market capitalization to increase is when the price of bitcoin goes higher.
Altcoins Fluctuation in Market Cap
Contrary to Bitcoin’s market cap, the total altcoin market cap is a little trickier to calculate. With thousands of altcoins to track, and new ones being launched each day, this is not a calculation you do by hand. Luckily, websites like CoinMarketCap calculate this number for you.
These two factors combine to determine BTCD. It is not enough just to look at the movement of both market caps. Instead, we must analyze which market cap is winning terrain against the other. Thus, BTC dominance can be summarized as a tug-of-war between altcoins and Bitcoin.
But there’s more! Market conditions, on-ramping via stablecoins, changing trends and new coins and projects all influence the bitcoin dominance in one way or another.
Bull or Bear Market
A major influencer of Bitcoins dominance is the overall condition of the market. Bitcoin’s dominance generally increases during bear markets, whereas it loses ground during a bull market. This is because crypto investors consider Bitcoin a safe haven, whereas altcoins are more speculative in nature.
Changing Trends and Narratives
A great example of why trends can influence Bitcoin’s dominance can be found in the DeFi summers of 2020 and 2021. During these summers, the DeFi sector performed incredibly, with many tokens doubling prices in mere weeks, even when the rest of the market was relatively dull. This rally sent the total altcoin market cap higher, pushing Bitcoin’s dominance down.
New Coins and Projects
Finally, an obvious factor is the number of new tokens and projects being launched in the market. Every new project or token launch boosts the market share of altcoins by a tiny bit. This makes the dominance metric inherently trending down, as the overall crypto industry grows.
How to Use BTC Dominance in Trading
Identifying Altcoin Season
As discussed earlier, DeFi summer caused Bitcoin’s dominance to drop. The same thing happens during altcoin seasons. Monitoring Bitcoins dominance can therefore give you early signals of a starting altcoin season, allowing you to allocate your funds to promising altcoins before they start running, maximising your profit potential.
When the dominance starts to reclaim ground, it is time to swap your altcoin positions back to BTC and wait for the next altcoin season.
Spot the Strongest Trend
Traders can also monitor Bitcoins dominance in combination with Bitcoin’s price behaviour to derive trading signals.
For example, when both price and bitcoin dominance rise, traders tend to flock to Bitcoin, as it is the strongest horse in the race. On the other hand, when Bitcoin’s price increases, but the dominance metric falls, it suggests altcoin season is in full force.
The opposite is true for when Bitcoin is falling while the dominance rises, it shows an altcoin bear market. Finally, when Bitcoin and its dominance are falling in unison, the entire crypto market is in a bear trend.
These patterns in price and dominance are not definite but can be indicative of strength.
Manage Risk
Bitcoin dominance can also be used to manage your risks. For example, when bitcoin dominance goes on a rally, traders can decide against buying altcoins for the foreseeable future, to protect their hard-earned capital.
Bitcoin Dominance Index Criticisms
Although popular, the Bitcoin dominance metric gets its fair share of criticisms. Opponents of the metric cite the flaws of market capitalization metrics and the ever-increasing supply of altcoins as reasons why the dominance metric is inherently flawed.
Increased Supply
As mentioned earlier, the seemingly never-ending supply of freshly minted altcoins puts pressure on bitcoin dominance. Critics use this inflow of new altcoins to question the value of a dominance metric that – in their view – will always trend down.
Market Cap Shortcomings
These same critics often discuss the shortcomings of market capitalization metrics, which is commonly calculated by multiplying the token value by the number of tokens in circulation. This is where their quarrel with the metric lies, as many BTC have been lost in forgotten wallets, or sits abandoned elsewhere.
Their argument is that the true market capitalisation of Bitcoin (and alts) may therefore be much lower.
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