Bitcoin Dominance (BTC): How It Affects Trading

With the explosive growth in the number of cryptocurrencies that can be invested in, traders are constantly looking for new tools to identify trends in cryptocurrencies. The bitcoin dominance ratio is a tool that traders have recently included in their work to help them spot differences in overall market conditions between bitcoin and all other coins.

When used correctly, the Bitcoin (or BTC) Dominance Ratio can help you determine if altcoin trading is a stronger trend than Bitcoin trading. The terms “Bitcoin dominance”, “Bitcoin dominance ratio”, and “Bitcoin dominance index” are often used interchangeably, as are “Bitcoin” and “BTC”. In this article, we will discuss what Bitcoin dominance is, as well as what factors affect the ratio and some of the strategies you can apply when making crypto investment decisions.

What is Bitcoin's dominance?

Dominance of Bitcoin is the ratio between the market capitalization and the market value of a cryptocurrency.
Market capitalization (or market price) of cryptocurrencies is an indicator of its market value. In other words, this is...
Bitcoin to the total market capitalization of the entire cryptocurrency market. If you compare this ratio with the dynamics of Bitcoin itself, you can learn more about the opportunities offered by the current market environment.

To better understand what Bitcoin dominance is, traders need to understand what is market capitalization - and why it matters.

What is the market capitalization of a cryptocurrency?

In the case of a cryptocurrency like Bitcoin, market cap means the total value of all the coins that have been mined so far. Market capitalization is calculated by multiplying the number of coins in circulation by the current market price of one coin.

For example, as of November 2021, there were approximately 18,881 million bitcoins in circulation. If the price of bitcoin traded at $ 60, then the total market value would be 000 million x $ 18,881 = $ 60 trillion. This means that the total value of the Bitcoin network is $ 000 trillion.

By itself, the $ 1,133 trillion figure doesn't really matter until you start comparing it to other markets. For example, the total estimated value of the gold market is about $ 10 trillion. This means that Bitcoin is worth about 11% of the value of gold. An investor can determine if he believes the Bitcoin network will be worth more over time, or if it is becoming overvalued.

One of the advantages of cryptocurrencies is that it is easy to determine the number of coins in existence, as well as their value. Thus, it is quite easy to determine the total market value of the entire cryptocurrency market.

The relationship between bitcoin dominance and market capitalization

When calculating bitcoin dominance, the market value of bitcoin and the total market value of the cryptocurrency are used.

It is not difficult to define and graph both indicators used in this ratio. Below we see Bitcoin market share (left graph), total cryptocurrency market share (middle graph) and Bitcoin dominance (right graph).

In general, the shape and direction of the total cryptocurrency market capitalization will follow Bitcoin's capitalization. This is partly due to the impact of Bitcoin on the entire cryptocurrency market, as it is the first, largest and most widely accepted cryptocurrency.

As crypto investors and traders, we take it for granted that most people in the world know little about the breadth of the crypto market. Therefore, they may believe that Bitcoin is the only existing cryptocurrency.

As a result, if there is an appetite for buying cryptocurrencies, Bitcoin and the entire cryptocurrency market tend to grow, leading to higher market caps for both companies. If risk aversion arises in the cryptocurrency market, then most of the major cryptocurrencies will be liquidated, leading to a decline in the overall market value.

Factors Affecting Bitcoin's Dominance

In the early days of cryptocurrency, bitcoin dominance was around 95% or more as there were very few altcoins attracting investment. However, as other altcoins began to attract interest, Bitcoin's dominance declined.

For example, when the ICO wave (initial coin offering) erupted in 2017, altcoin investment began to grow, and bitcoin dominance fell to a minimum of 35%. Since 2018, Bitcoin's dominance has returned to a high of around 70% as many of these altcoins have crashed.

Starting in 2021, bitcoin dominance began to decline again as altcoin investment increased amid negative news surrounding bitcoin's energy use and China's eradication of bitcoin mining, putting pressure on investment.

If we take a close look at the formula that creates the relationship known as Bitcoin dominance, we find these two variables included in the calculation:

• Bitcoin market value
• The total market value of the entire cryptocurrency market.

These are two main factors that affect Bitcoin's dominance ratio.

Bitcoin price fluctuations

The market value of bitcoin is the numerator of the bitcoin dominance ratio. Since the number of bitcoins in circulation is quite stable and will not grow much, the biggest impact on the market value of bitcoin is its price.

The relationship between bitcoin price and market cap can be seen in the chart above. Please note that market capitalization is closely related to Bitcoin price movement. As Bitcoin's price rises, its market capitalization tends to rise proportionally.

However, if the market value of bitcoin rises, this does not mean that the dominance of bitcoin is increasing. The market capitalization of bitcoin is just the numerator of the ratio. The speed at which the market value of bitcoin moves is compared to the second biggest factor influencing the ratio: the market value of altcoins.

Altcoin market capitalization fluctuations

The denominator of the coefficient is the total market value of all cryptocurrencies. This indicator is a little more difficult to calculate due to the huge number of cryptocurrencies. There are currently over 12 cryptocurrencies, which is a huge number to keep track of. Luckily, several websites do this calculation automatically.

There are times when the price of Bitcoin tends to rise, which significantly increases the market value of Bitcoin. Likewise, there are times when investments in altcoins are growing faster than in bitcoin.

In the chart above, notice that the first trend on the left (in black) is much larger and stronger than the corresponding rise in Bitcoin's market value on the right. This suggests that the collective valuation of altcoins is growing faster than the valuation of Bitcoin, which means that altcoins have a strong impact on the overall market value.

Then, after the correction, the trend on the left (blue) continues to rise at a faster pace than the market value of Bitcoin (right chart). As a result, Bitcoin's share of the total cryptocurrency market valuation is diluting and getting smaller.

How to Trade Cryptocurrency Using BTC Dominance

There are many ways to use the dominance of BTC to your advantage. Two common sectors in cryptocurrency are bitcoin and altcoins. We can use the ratio to determine which of the two sectors is the stronger trend to trade, and we can also anticipate extreme readings and trade reversals from highs and lows.

Strategy 1: Using BTC Dominance To Identify Strongest Trend

Traders can use the Bitcoin Dominance Ratio to determine if Bitcoin is a stronger trend or if investing in altcoins has more potential. BTC's dominance ratio determines which trend can outperform another so that a trader can position itself accordingly.

First, identify the trend of BTC dominance. you can use TradingView chart to view the index.

Second, identify the Bitcoin price trend over a similar time frame.

Finally, use this chart to help you determine your strategic bias.

BTC Dominance Index	Bitcoin's Trend	Signal
ratio in uptrend	bitcoin in uptrend	Buy Bitcoin
ratio in uptrend	bitcoin in downtrend	sell altcoins
Raio in downtrend	bitcoin in uptrend	Buy altcoins
ratio in downtrend	bitcoin in downtrend	sell Bitcoin

Once the bias is established, you can identify trading opportunities using price action, candlestick patterns, and / or other technical indicators.

Strategy 2: Trade Extreme Highs and Lows

Between 2018 and 2021, Bitcoin's dominance ranged from a low of 35% to a high of 74%. Since the universe of cryptocurrencies is constantly expanding, it is unlikely that this ratio will significantly exceed 74% in the future. On the other hand, a dominance ratio below 35% suggests that the total value of altcoins is growing rapidly compared to bitcoin.

Another strategy to consider is trading the relevant market when the ratio reaches extremes. When the ratio approaches these historical levels, there is a risk of the ratio reversing. Therefore, when the ratio reaches extremely high values, the markets are ripe for the ratio to fall. On the other hand, extremely low numbers could lead to an increase in Bitcoin dominance.

The simple reason for this is that investors will judge the value of a cryptocurrency by its counterparts. If investments have been poured into altcoins for some time, then the potential for growth in the rate and value of Bitcoin may be more likely.

Traders can use the table below as a guide to determine which markets to focus on when BTC dominance is threatened with a reversal.

BTC Dominance Index	Bitcoin's Trend	Signal
Ratio at a historic high	Bitcoin uptrend	Sell ​​Bitcoin
Ratio at a historic high	bitcoin downtrend	Buy altcoins
Ratio at a historic low	Bitcoin uptrend	Sell ​​altcoins
Ratio at a historic low	bitcoin downtrend	Buy Bitcoin

By definition, it is rare for Bitcoin's dominance to reach such historic highs and lows. However, when the ratio reaches extreme levels, it can open up good trading opportunities. However, it is important to manage your risk as the ratio is known to break through these historical levels.

Is Bitcoin Dominance a Reliable Indicator?

Cryptocurrency markets are complex ecosystems. Therefore, no system can be simplified to the use of a single indicator. The dominance of bitcoin is just one of many possible indicators that describe the current market situation.

As a result, relying solely on Bitcoin's dominance as a metric is likely to lead to losses and / or inconsistent results.

One of the downsides is that it is only recently that the number of altcoins has actually increased, leading to a decrease in the dominance ratio. Accordingly, we do not have a large amount of historical data on the basis of which it would be possible to identify recurring trends.

In addition, if the number of altcoins continues to grow in the future, then it is possible that the dominance ratio will get smaller and smaller, reaching new lows. If this happens, then the bitcoin dominance index may lose its usefulness.

Сonclusion

Bitcoin dominance ratio is a great tool to help you understand trends in the cryptocurrency market. Depending on the trends in the ratio and the price of bitcoin, a trader can determine who is stronger - altcoins or bitcoin.

Bitcoin's dominance is not without its limitations. Since the cryptocurrency market is so new, it is possible that more altcoins will appear on the network in the next few years, rendering the index obsolete. But at least for now, it can help traders better understand the conditions of the cryptocurrency market.