The blockchain and crypto ecosystem has been growing at a rapid speed. Bitcoin was the first on this market and is the biggest cryptocurrency in the world by market capitalization.
This caused new ideas to be developed to better read the crypto market in general. The Bitcoin Dominance index is one of those tools traders started using to find trends between Bitcoin and altcoins.
With the Bitcoin Dominance Index traders are able to see which is better to trade at the moment, Bitcoin or altcoins. In this guide, we will discuss what Bitcoin Dominance means, what has an effect on it, and how to use it to our advantage.
The Bitcoin Dominance ratio shows us which is more desirable right now - Bitcoin or altcoins. Are people selling Bitcoin and buying altcoins or are people buying Bitcoin and selling altcoins? To see which of these two is happening and determine the Bitcoin Dominance ratio, we have to look at the ratio of the total market capitalization of Bitcoin compared to the whole crypto market.
For example, if we are seeing that the Bitcoin market cap is falling, while the market cap of other cryptos is rising, it means that the Bitcoin Dominance Index is low and more people are buying altcoins rather than Bitcoin.
To better understand why Bitcoin Dominance is so important and what it means, we need to have a better understanding of market capitalization and why it is important.
Market capitalization is the amount of money that the whole supply of one crypto is worth. There are two numbers that determine different market caps. One is the value of the circulating supply and the other is the value of the available supply. This number is calculated by multiplying the circulating supply by the price of one Bitcoin.
Here is a simple example that will help us better visualize this process. At the time of writing this guide, Bitcoin trades at $30,533 and there are 19,062,637 Bitcoin tokens in circulation. To determine its market value we have to multiply 30,533 by 19,062,637 which is 581.681 billion. This means that the Bitcoin market cap is $581.681 billion.
Compared to traditional markets, it is significantly easier to determine the value of any given crypto token as the information that is needed to calculate the value is easily accessible on many different platforms.
As we mentioned before, we need to take the Bitcoin market cap and the market cap of the whole crypto market to calculate the dominance index.
Bitcoin Dominance = Bitcoin Market Cap / Whole Crypto Market Cap
When calculating the Bitcoin Dominance index and charting it, we will see that in general the whole crypto market cap somewhat follows the Bitcoin market cap. This is because Bitcoin was the first crypto on the market and was the foundation for altcoins. Because of this, it has such a huge influence on the market.
Because of this status, most of the altcoins depend on Bitcoin. So if the Bitcoin price rises, the whole crypto market cap tends to follow it. But this status also has its negatives on Bitcoin. If there is some major global news or events which require increased spending, Bitcoin's prices usually fall as investors are liquidating their Bitcoins for fiat currencies, so its market cap follows suit.
At the beginning of the Crypto lifecycle, Bitcoin Dominance was hovering over 90% as there were not many altcoins on the market and there was little interest in those that were.
But then with developments in blockchain technology and the interest in crypto rising, more and more altcoins started to show up and gather interest from investors. This caused Bitcoins Dominance to fall as low as 35% at some point.
So when we want to determine what influences the Bitcoin dominance ratio, there are three things we need to take into consideration.
Some people believe that if the price of crypto is increasing, it will result in an increase in the market cap of said crypto. In general, this thought process is correct, but there can be cases when the price of one crypto has increased, but there also was a burn that removed some amount of crypto from circulation, and even though the price increased, decreased circulation might cause the market cap to fall or remain the same as it was.
But for Bitcoin, it is impossible for this to happen. It has a max supply and no one is burning Bitcoin which means that the Bitcoin market cap depends on the price itself and circulation is mostly the same.
Also, we need to understand that if the Bitcoin market cap is rising, it does not automatically mean that the Bitcoin Dominance ratio is rising. The thing we have to look at is the speed at which its market cap is increasing and how this speed compares to altcoin's market cap increase speed.
Altcoins market cap is the market cap of every cryptocurrency taken together excluding Bitcoin. This number is not easy to calculate as there are more than 18,000 altcoins as of August 2022, you can read more about them in our crypto guides. This number is increasing on a daily basis, but fortunately for us, there are platforms that track this number.
When Bitcoins Dominance is decreasing, this means that altcoins prices are rising faster than Bitcoins, or they are falling slower than Bitcoins.
To better visualize how it works, take a look at the two graphs below.
When we look at the altcoin chart we can see that the speed at which it increases is relatively higher than that of Bitcoin. This means that more people are investing in altcoins, thus decreasing the ratio between Bitcoins' market cap compared to the whole crypto market cap. As a result, the Bitcoin Dominance Index is falling and there is more interest in altcoins.
When trading cryptos, the Bitcoin Dominance ratio is a good indicator to determine which is trending right now, Bitcoin or altcoins. We can use this index with different strategies. Let’s take a look at some of them.
2018 was the year Bitcoin gained mass recognition after hitting unimaginable prices in 2017. From that period up until now, Bitcoin Dominance has fluctuated between 35% and 79%.
When trading, some people found that looking at these high highs and low lows is a good way to determine which is better, to buy Bitcoin or altcoin.
When Bitcoin Dominance reaches high numbers, the market tends to change and Bitcoin Dominance usually falls, which means that it is a good time to sell Bitcoin and invest in altcoins. On the other hand, if Bitcoin Dominance is really low and altcoins are trending higher, the market usually tends to bend towards Bitcoin and more people start to invest in it. Because of this, when Bitcoin's dominance is extremely low, it is a good idea to buy Bitcoin and sell altcoins.
This happens because of potential growth. If altcoins are trending high for some time and Bitcoin dominance is low, altcoins' growth starts to decrease and investors are not getting as big of a return as they did before, so they start to migrate towards Bitcoin with hopes that it will give them bigger returns, and vice versa.
| BTC Dominance Ratio | BTC’s Trend | Signal |
|---|---|---|
| Ratio at Extreme High | Bitcoin is Uptrending | Sell Bitcoin |
| Ratio at Extreme High | Bitcoin is Downtrending | Buy Altcoin |
| Ratio at Extreme Low | Bitcoin is Uptrending | Sell Altcoin |
| Ratio at Extreme Low | Bitcoin is Downtrending | Buy Bitcoin |
This strategy is more set in stone and is easy to follow.
The Bitcoin Dominance Index helps us to determine which is more trendy and in demand right now, Bitcoin or altcoins. And after knowing the demand, it is easier to decide which crypto is worth investing in.
To use this strategy all we need to know is the trend of Bitcoin dominance and the trend of the Bitcoin price.
The graph below is all you need to determine what to do.
| BTC Dominance Trend | BTC Trend | Signal |
|---|---|---|
| Index is Uptrend | BTC is Uptrend | Buy BTC |
| Index is Uptrend | BTC is Downtrend | Sell Altcoin |
| Index is Downtrend | BTC is Uptrend | Buy Altcoin |
| Index is Downtrend | BTC is Downtrend | Sell BTC |
The crypto world is full of complex and hard-to-predict trends. This caused traders to look for many different signals which tell us what is the best investment right now. The Bitcoin Dominance Index is only one of those signals, so relying only on it is not a good idea.
With more and more altcoins being added to the market, Bitcoins' Dominance is falling. As the altcoin ecosystem keeps expanding, this indicator might not be useful in the future.
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If the Bitcoins Dominance Index is going up, it means that there is less demand for altcoins and more demand for Bitcoin. This means that it is likely that Bitcoin's price will go up, while most altcoins will lose some value.
When Bitcoin dominance is high, it generally means that more money is flowing into Bitcoin than into altcoins. This also means that the ratio between the Bitcoin market cap and the whole crypto market cap is rising.
Bitcoin is the biggest crypto in the world and has the biggest power over the whole crypto market. With Bitcoin dominance, we can easily gauge what is trending and what to buy at the given moment.
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