Bitcoin is the most popular, trusted, and globally accepted cryptocurrency. It is the mother of all coins as it is the first cryptocurrency ever created. Its market capitalization is the largest, and its volatility sometimes decides the market's direction for other cryptocurrencies —altcoins. As a result, traders pay attention to the price movement of the coin to determine the market's direction. This considerable influence Bitcoin has on the general cryptocurrency market is expressed in a trading metric known as Bitcoin Dominance.
What is Bitcoin Dominance
Bitcoin dominance is the ratio of bitcoin's market capitalization to the total market capitalization –the market capitalization of a specific cryptocurrency refers to its overall market value– of the cryptocurrency market. Bitcoin dominance is the percentage of the total cryptocurrency market capitalization that bitcoin possesses. Therefore, we can learn more about the opportunities present in the current market environment when we compare this ratio to the trend of bitcoin.
Before introducing other cryptocurrencies, bitcoin had complete dominance (100%) because it was the only coin in existence. But, when Ethereum was created, it took some percentage of bitcoin dominance. As time passed and new altcoins were developed, bitcoin's dominance began to decline. Furthermore, the emergence of initial coin offerings increased the overall market capitalization of cryptocurrencies, decreasing the percentage of bitcoin dominance.
Two factors are constant in the equation in determining the bitcoin dominance ratio.
The market capitalization of Bitcoin.
The market capitalization of the general cryptocurrency market.
For example, if the total market capitalization of all cryptocurrencies is $100 million, Bitcoin's total market capitalization is pegged at $40 million. This implies that the Bitcoin dominance of the market is 40%.
This means that the growth of other cryptocurrencies depends on the dominance level. Hence, if the percentage of bitcoin dominance increases, the percentage of altcoins will decrease. The bitcoin dominance metric aims to highlight the fundamental character of bitcoin in the cryptocurrency market and its extremely high value compared to other cryptocurrencies. Furthermore, since it indicates the market's direction, it becomes an important metric and a tool for traders to get a hold of how the market is performing.
Using Bitcoin Dominance for trades
The most crucial aspect of bitcoin dominance is that it enables traders to determine whether altcoins are experiencing an uptrend or a downtrend relative to bitcoin. It indicates the future direction of the market. It can be determined in two ways;
The overall value of altcoins decreases to bitcoin as bitcoin dominance increases.
The overall value of altcoins increases as bitcoin dominance decreases.
A trader may use this indicator to determine when to buy a bitcoin or trade a different altcoin.
Another way to utilize the bitcoin dominance metric is trading the appropriate market when the ratio reaches extremes, that is, its highs and lows. A change in the ratio is possible when it gets close to these previous levels. Therefore, markets are ready for the ratio to fall when it reaches an extremely high reading. On the other hand, an incredibly low reading could increase the bitcoin dominance level.
Consequently, in the crypto bull market, there is a consistent decline in bitcoin dominance as enough funds are being pumped to altcoins because intense bull markets push altcoins' capitalizations higher than Bitcoin. Similarly, a reversal of this trend is usually indicative of a bear market. Therefore, bitcoin's dominance is a useful indicator when monitoring the market.
Effect of Bitcoin Dominance on the market
Unlike altcoins, the price of bitcoin fluctuates very little and holds its value over a more extended period. As a result, bitcoin's dominance is consistently high regardless of whether the market season –bullish or bearish. However, bitcoin's dominance affects the market in the following ways;
When there is a decline in bitcoin dominance but an increase in its price, it indicates that altcoins outperform bitcoin.
When there is a decline in bitcoin dominance along with a decline in the price of bitcoin, it indicates a general bear market. Furthermore, it suggests that all cryptocurrencies will likely decline.
When there is an increase in bitcoin dominance along with an increase in the price of bitcoin, it indicates that bitcoin outperforms altcoins.
When there is an increase in bitcoin dominance but a decrease in bitcoin price, it indicates that altcoins outperform bitcoin.
Final Takeaway
In understanding the current market's general direction, it is crucial to know how dominant Bitcoin is. If the index declines, investors take on greater risk and purchase alternative coins with a lower market capitalization to increase their returns. Often, a developing market will exhibit this. Conversely, when the market enters a bearish phase, altcoins are actively sold, and funds are moved to bitcoin, the most stable cryptocurrency, from which the index increases.
Cryptocurrency and its market are volatile. As a result, it isn't easy to reduce the market situation to a single indicator. The dominance of Bitcoin is merely one of many indications that reflect the current market condition. As a result, depending entirely on Bitcoin dominance will almost certainly result in inconsistent outcomes. It is also worth noting that market capitalization does not imply a capital inflow. It is simply a calculation based on the current market price and supply.
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