The Bitcoin Dominance Explained
Published September 3rd, 2022
Bitcoin and other cryptocurrencies have taken the financial world by storm in recent years. With the growing interest in this new form of currency, it's important for investors to understand the intricacies of the market. One key aspect of cryptocurrency investment is understanding Bitcoin dominance and how it impacts the value of altcoins relative to Bitcoin.
Bitcoin dominance measures the market cap of Bitcoin compared to all other cryptocurrencies. It's a valuable tool for analyzing the entire altcoin market, and technical analysis can be used to predict altcoin and Bitcoin's direction. When the Bitcoin dominance increases, altcoin-BTC pairs fall in price, and when it decreases, altcoins outperform Bitcoin. Investors should keep an eye on the Bitcoin dominance, with a dominance of over 60% being optimal for moving into altcoin positions. However, due diligence and staying up to date with the latest trends and news is crucial in the volatile cryptocurrency market.
In this article, we'll explore the concept of Bitcoin dominance and how it can be used to inform investment decisions in the cryptocurrency market.
The Bitcoin Dominance is a measure of the marketcap of Bitcoin compared to the rest of the cryptocurrencies in existence. It is measured as a percentage. The basic formula to calculate the Bitcoin dominance is :
This ratio can be used for data analysis involving altcoin pairs relative to Bitcoin. It can also be used in analysis of the entire altcoin market and where it is headed.
It also allows us to gauge or estimate where Bitcoin is headed in relation to the altcoins. For example, we may want to figure out whether or not Bitcoin outperforms Ethereum and similar altcoins.
Technical analysis can be used on the Bitcoin dominance chart. Using resistance and support lines seems effective to try to predict where Altcoins and Bitcoin are headed.
Because stable coins are technically cryptocurrencies, they are included in the calculation of the Bitcoin dominance. Many analysts take out the stable coin dominance in their analysis because stable coins hold a significant part of the entire market now.
Since the Bitcoin dominance is used for analysis of altcoins and Bitcoin, stable coins are irrelevant. The stable coin Tether(USDT) holds a 6.5-6.7% dominance, for example.
Many tools such as TradingView, allow us to subtract the dominance of stable coins from the altcoin dominance. It also allows people to subtract the stable coin dominance from the Bitcoin dominance.
Though this tool on trading view isn't precise and can give misleading data. Thankfully, we have created out own tool to analyze the Bitcoin Dominance by excluding most stable coins.
This can give us more precise results and data analytics.
When the Bitcoin dominance goes up, it means it is appreciating faster than most of the other altcoins relative to it. This by association, also means that Bitcoin appreciates faster than Ethereum, Binance Coin, XRP and Cardano, the current largest altcoins by market capitalization.
The altcoin to BTC pairs also falls in price. They are inversely correlated. When the Bitcoin dominance goes up, altcoin – BTC pairs fall. This can be illustrated in the next two images.
We can see from these two images, the first one being the Bitcoin dominance, and the second being the ETH/BTC pair, that they are inversely correlated. Not 100% of the time, but most of the time.
The Bitcoin dominance usually goes up when Bitcoin is in the start of a bull run or when it is in a very volatile movement downwards.
It is interesting to notice how the dates of the highs and lows for each chart are significant.
The appreciation of Altcoins like Ethereum, BNB and Cardano outpace the appreciation of Bitcoin. Altcoins outperform Bitcoin in simpler terms.
This is what happens when the Bitcoin dominance goes down. Altcoin pairs relative to Bitcoin like the ETH/BTC and BNB/BTC go up. People can trade these pairs to increase their Bitcoin holdings.
This phenomenon is illustrated in the previous image, where the Bitcoin dominance is illustrated. When the Bitcoin dominance goes down, the ETH/BTC pair goes up.
The Bitcoin dominance usually goes down at bull run peaks and somewhat right after bear markets. Bitcoin dominance runs in cycles of about 4 years.
Currently, in the past two cycles the Bitcoin dominance has hit lows of under 40%. The higher the Bitcoin dominance, the better it is to be in an altcoin position. We put this at above 60% Bitcoin dominance. 60% BTC dominance is great for moving into altcoin positions.
When the Bitcoin dominance is under 40%, it is riskier to be in Altcoins as opposed to Bitcoin because the trend can revert back upwards. This zone is a historic resistance point. This usually happens because of Bitcoin cycles.
The Bitcoin dominance shouldn’t really be a consideration, for long term investors, because overtime altcoins tend to outperform Bitcoin. This is however, with the consideration that people buy blue-chip altcoins.
Some altcoins dump 90% and never go back up. Some altcoins die in the bear market and never return.
In conclusion, understanding Bitcoin dominance is crucial for investors in the cryptocurrency market. It provides a way to gauge the performance of altcoins relative to Bitcoin and helps in making informed investment decisions.
However, it's important to note that the market is volatile and constantly changing, so investors should always do their due diligence and stay up to date with the latest trends and news in the crypto world.