What is Bitcoin Dominance?
Bitcoin dominance is the ratio between Bitcoin’s market cap and the total capitalisation of the entire cryptocurrency market. The ratio measures BTC coins’ value relative to other cryptocurrencies, which helps investors make financing decisions.
The BTC dominance index is measured in percentage and tracked online by various services, but how do you calculate BTC dominance yourself? Well, actually, It’s pretty simple — you must divide BTC’s capitalization by the crypto market’s capitalization. Then, you calculate using the formula “market capitalization BTC / Market capitalization of crypto market = BTC dominance index.” So if, for example, BTC had a market capitalization of $50 million and an entire market capitalization of $100 million, then bitcoin’s dominance would be 50%.
What does Bitcoin Dominance mean?
Today, there are more than 12,000 different coins on the cryptocurrency market, according to a Coinmarketcap report. Even so, investors are still at war with each other: Bitcoin fans believe that BTC will soon rule the market, while other investors are agitating for portfolio diversification. In this case, the first side’s main argument is the Bitcoin Dominance Index, which measures how much BTC outperforms all other cryptocurrencies combined.
However, the structure of BTC’s dominance in doing so is gradually eroding. It is primarily due to the development of altcoins, which have captured a significant capitalization share. Additionally, Ethereum’s emergence has played a significant role. It is now the second most capitalized and popular cryptocurrency globally. The dominance of Ether coins is around 20%, meaning that the coin owns a fifth of the space of the entire crypto market. Stablecoin, on the other hand, dominates 6% of the total capitalization. All this suggests that BTC dominance, although superior to all other cryptocurrencies, is nevertheless not unconditional.
Many experts foresee a gradual decline in BTC dominance, which is why they recommend diversifying your portfolio. In this case, tracking the dominance of BTC can help investors predict the lowest and highest point of cryptocurrency rates, get information about current market sentiment and thereby suggest how to position themselves. After all, no matter how obscure BTC’s future is, bitcoin still significantly impacts the crypto market: where Bitcoin moves, so do altcoins. Consequently, when BTC suffers, other cryptocurrencies are also at risk.
Why is Bitcoin Dominance Important?
The Bitcoin Dominance Index is good because it can help you, as an investor, to know the following in addition to all the above.
- The current market phase — if you have the expertise to do so, you can get information about the following, just the nascent stage.
- Knowing U-turn patterns, i.e., reversal of market trends. Understanding this is essential for taking risks, and it also helps you to invest in a good coin at the right time and to pay the price difference.
- New altcoin seasons and peak demand.
- The beginning of the short-term price consolidation phase, which in a bearish period of the market (a so-called recession period), can predict the growth of BTC dominance.
The History of Bitcoin Dominance
BTC dominance history is less exciting than the emergence of Bitcoin itself. The emergence of the index is explained by investors’ need for a single universal measure that would allow them to compare many altcoins with one another and determine where the market is today (up or down). The relevant chart appeared after the ICO boom in 2017, but the index has only recently gained popularity in 2021.
Bitcoin Dominance Chart
Most services display BTC dominance figures in a chart or chart format, which can be detailed in the settings. For example, often, the Bitcoin dominance chart additionally contains or even displays by itself such information as:
- Balancing Risk. Suppose the current Bitcoin dominance chart shows growth. In that case, this indicates an increased risk appetite among crypto traders – a bullish period is coming, i.e., an active market upturn. The opposite situation can be seen in the bullish period when BTC becomes the most reliable option for investment.
- Market Overview. Because Bitcoin directly correlates with the rest of the cryptocurrency market, you can gauge the position and trends in other crypto assets by the rise or fall of its dominance. Also, many BTC charts offer built-in ETH (decentralized, open source, and distributed) dominance tracking.
- Trading Opportunity. The BTC dominance index is often used as a trading tool to sell or buy BTCDOM /USDT futures. However, this is only relevant for investors who know how to read a bitcoin chart competently.
It is vital to note, however, that the chart does not visit the ICO and Stablecoin market, which has led some to believe that the actual observation dominance figure is significantly different from the one that appears.
For example, you can check BTC dominance today on websites such as Tradingview or Ticker.
How Bitcoin Dominance Works
You already know why the watch dominance index is needed and how to use it, but how does it work? Well, several factors influence the decrease or increase of dominance:
- The cost of Bitcoin. The connection here is straightforward: the higher the price of one BTC coin, the higher the cryptocurrency’s dominance.
- Popularity and demand — the dominance of BTC increase markedly with the growth of its community or positive events where cryptocurrency appears.
- Altcoin positions. Even though the impact of small alternative coins on such an extensive system as BTC seems doubtful at first glance, Bitcoin’s dominance depends on the current demand for altcoins. However, here the connection is no longer direct but indirect: when people are ready to experiment and consider alternatives to BTC (for example, during the market upswing, when the risks are minimal), the decline in Bitcoin’s popularity begins. That, by the way, also forms a closed cycle because Bitcoin’s dominance declines, dragging the entire market after it.
- Market trends. The dominance of BTC is constantly growing during a period of decline in total capitalization since Bitcoin has long established itself as a reliable asset, financing which is justified in any case and is capable of, if not multiplying, then at least saving savings. However, as already mentioned, there is an inverse correlation since people are prone to raise risks during the market rise.
How Bitcoin Dominance Impacts Altcoins
Altcoins react pretty strongly to any expectation of observation dominance, if not to say that it manifests and manifests itself depending on it. Thanks to the dynamics of the index, one can use it to assess the development of altcoins, which can be particularly useful for investors, as altcoins are mainly trading in an uptrend or downtrend relative to this observation.
There is also the following correlation: when the price of BTC remains stable when it is dominant or when the price is falling, the price of altcoins is also stable. However, when both the price rises and BTC becomes dominant simultaneously, altcoins begin to lose market share as their share, demand, and ranking position decrease. It often happens when Bitcoin goes through a consolidation phase, and the market starts to rise.
Moreover, when surveillance dominance grows, the frequency of altcoin uptake rises like wildfire. So here we offer some advice to novice investors: don’t hold either BTC or altcoins during such periods — prefer stablecoins, as the cryptocurrency market will likely experience a crisis soon. Indeed, it is at least likely to let you live peacefully.
In fact, altcoins nullified BTC’s ambitions to become the world’s leading cryptocurrency: before their emergence, the market domination reached almost 90%! However, the more popular games, fintech, and art using traffic technologies became, the more flexible and varied the market became, which inevitably caused new projects and start-ups to emerge.