- When the price and dominance of BTC are rising, it could signal a potential bitcoin bull market.
- When the price of BTC is rising, but BTC dominance is falling, it could signal a potential altcoin bull market.
- When the price of BTC is falling, but BTC dominance is rising, it could signal a potential altcoin bear market
- When the price and dominance of BTC are falling, it could signal a potential bear trend for the entire crypto market
Bitcoin dominance has for a long time been used by crypto investors as a benchmark to help leverage and adjust their trading strategies and portfolio structures. Otherwise known as BTC dominance, bitcoin dominance is the ratio of the market capitalization of bitcoin to that of the entire cryptocurrency market.
Market capitalization refers to the value of an asset in circulation. For bitcoin, it is calculated by the total number of assets mined multiplied by its current value in the market.
Since 2009 when bitcoin came into the scene, thousands of altcoins have surfaced. Despite that, bitcoin has remained the largest digital asset by market capitalization. The existence of the original cryptocurrency in the market for over 13 years has enabled crypto traders to spot certain recurring patterns of market conditions.
BTC dominance has been a major guide to most investors’ trading behaviour. In the ongoing market crash that has pushed bitcoin below US$19500, BTC dominance has offered insight into the current general market trend.
How to calculate bitcoin dominance using market capitalization
As stated earlier, market capitalization is calculated by multiplying the current bitcoin price and the number of BTC mined.
Here is the formula to determine bitcoin dominance:
Bitcoin dominance = Bitcoin market cap/ Total crypto market cap
What factors affect bitcoin dominance
Changing trends in the crypto market
Before altcoins, bitcoin dominance used to hover above 90 per cent. However, with the increase in popularity of altcoins, bitcoin has lost its undivided attention to other assets with greater price swings and projects with several use cases.
Bitcoin was created to change how the transfer of value worked. Unlike bitcoin, altcoins have evolved in different sectors such as gaming, art and DeFi services beyond just transferring money. As such, current trends in other sectors may create more interest and trade around a particular crypto project. A case in point, the emergence of NFTs has caused BTC dominance to drop in favour of NFT- related tokens.
Bull or bear market
Over the last five years, stablecoins have gained popularity, a trend that exerted pressure on BTC dominance. Stablecoins provide more assurance and security over bitcoin, specifically in a bear market or in times of volatility.
Crypto investors often use stablecoins to lock in profits without converting their crypto to fiat. With the trend of moving funds from bitcoin into stablecoins, bitcoin dominance will ultimately decrease.
Bitcoin is also not safe in the bull market. During a market pump, traders tend to move value from stablecoins into bitcoin. However, traders also have an option to choose other riskier options and pump liquidity into altcoins that are even more volatile than bitcoin.
The emergence of new coins
Most of the time, new coins quickly enter the market and gain popularity and traction, causing BTC dominance to dump. Despite them losing popularity as the hype dies down, more of these coins continue to appear, and the cycle continues.
How to use BTC dominance to trade
A method that can be applied to seek profit opportunities using BTC dominance developed in the early 1930s is the Wyckoff Method. It contains principles designed for investors and traders in the traditional financial markets.
Many investors and traders use the Wyckoff Method to identify market trends and time trades and estimating the likelihood of a trend reversal. According to the Wyckoff method, trading behaviour is in four phases:
Identifying where and when funds are flowing is important to some traders who rely on timing the market to make informed trading decisions.
Diversified Traders and investors often use this approach to pick the stronger trend. Below are several scenarios where the Wyckoff Method is at play.
Using BTC dominance to spot altcoin season
With the increasing number of altcoins in the market, it is unsurprising that bitcoin dominance is lowering. In recent years, some altcoins have gained more popularity, briefly causing the total market cap of all altcoins to surpass that of bitcoin. Periods when altcoins steadily outperform bitcoin are usually known as altcoin season. Under the Wyckoff Method principles, such movement of funds from bitcoin to altcoins is cyclical.
Because altcoins tend to perform better during an altcoin season, bitcoin may weaken its dominance during this market cycle phase. Therefore, people who trade both bitcoin and altcoins may monitor bitcoin dominance to adjust their portfolios accordingly.
Using BTC dominance with the current bitcoin price
Some people monitor bitcoin price and bitcoin dominance to help them make trading decisions. Although they are not iron laws, here are some potential outcomes that various combinations of BTC price and dominance may indicate.
When the price and dominance of BTC are rising, it could signal a potential bitcoin bull market.
With the price of BTC rising, but BTC dominance falling, it could signal a potential altcoin bull market.
When the price of BTC is falling, but BTC dominance is rising, it could signal a potential altcoin bear market.
With the price and dominance of BTC falling, it could signal a potential bear trend for the entire crypto market.
While these two factors do not imply a definite bull or bear market, historical observations suggest a correlation.