TL;DR
- Bitcoin Dominance refers to Bitcoin’s value in the market as a percentage of the total cryptocurrency market capitalization.
- Some crypto traders and investors use Bitcoin’s market share to inform how they trade and how they invest their assets.
Introduction
Bitcoin, the original cryptocurrency, is still the largest digital asset by market capitalization, despite the fact that thousands of altcoins have since emerged. Bitcoin’s fluctuating value relative to the crypto market as a whole has allowed traders to identify a few consistent trends. Some traders started to base their decisions on BTC market share. In particular, it is claimed that BTC dominance might reveal the prevailing market direction.
BTC dominance and market capitalization
Simply put, the market capitalization of an asset is its overall market value. Multiplying the current price by the total number of Bitcoins mined provides the market capitalization of all Bitcoins.
The formula for determining Bitcoin’s market share is as follows:
Bitcoin dominance = Bitcoin market cap/Total cryptocurrency market cap
Reasons for Bitcoin’s Dominance
Changing Trends
Bitcoin’s market share used to often exceed 90% before the advent of alternative cryptocurrencies. As the number of altcoins grew, investors and users began to shift their focus away from Bitcoin and towards other assets that offered more volatile prices or creative new applications.
Although the original intention of Bitcoin was to revolutionize the process of exchanging currency, crypto initiatives have expanded their scope. However, many alternative cryptocurrencies go beyond just money transfers and into the realms of gaming, art, and decentralized financial services. A certain sort of cryptocurrency project may attract more attention and trading activity in response to prevailing market conditions. For instance, it’s possible that BTC’s dominance has dipped slightly as a result of the emergence of NFTs, in favor of NFT-related tokens.
Bitcoin is now considered one of the “stable” crypto assets due to its long track record. The greater price volatility and accompanying profit opportunities offered by some of the more recent altcoins may influence traders’ interest in Bitcoin’s dominance. The potential gains may be more important than the industries represented by these altcoins.
Market: Up or Down
Stablecoins have been growing in popularity over the past few years, putting constant pressure on Bitcoin’s market share. Stablecoins are digital currencies that maintain their value during periods of extreme price fluctuations or bear markets. Stablecoins are a type of cryptocurrency that aim to keep their value consistent relative to another asset, either fiat money or a commodity. Stablecoins are a popular way for crypto traders and investors to avoid having to constantly transfer their funds into fiat currency. Bitcoin’s market dominance may decline if investors start switching their money to stablecoins.
The opposite is true during a bull market. Market gains may motivate investors to shift funds from stablecoins towards more liquid, speculative assets like bitcoin. The overall benefits of good market circumstances on Bitcoin’s dominance are very context-dependent, however, since confident traders may select riskier options and inject liquidity into altcoins that are even more volatile than BTC.
Stablecoin-based onboarding
Stablecoins make it easier to buy and sell a wide range of cryptocurrencies than it would be with fiat currency. Because gateway exchanges, which convert fiat to crypto exchanges, are available, they may only support the most widely used digital assets. However, crypto-to-crypto exchanges typically offer a wider variety of tradable cryptocurrencies. Stablecoins provide a means of entry into the cryptocurrency market for anyone interested in transacting in a narrow range of coins. Naturally, if a lot of new funds enter the market, it will dilute BTC’s dominance if they come in through stablecoins rather than Bitcoin.
New coins emerge
New coins that enter the market may swiftly gain popularity, reducing BTC’s market share. Keep in mind that Bitcoin is “fighting” with every other cryptocurrency out there, so the simultaneous birth of multiple famous altcoins may have an effect on Bitcoin. But as the initial excitement subsides, these cryptocurrencies’ popularity may decline. BTC’s supremacy in the cryptocurrency market could return if investors start shifting their money back to Bitcoin (BTC) from other cryptocurrencies.
Trading with Bitcoin’s dominance
Method of Wyckoff
The Wyckoff Method is a series of guidelines developed in the early 1930s for participants in traditional financial markets. You may use some of these rules to your advantage when looking for ways to make money from BTC supremacy, including the law of cause and effect.
In order to spot market trends, calculate the chance of a trend reversing, and time trades, many traders and investors rely on the Wyckoff Method. Wyckoff identifies four stages (accumulation, markup, distribution, and markdown) that characterize commercial activity. Some investors who rely on market timing to make judgements may find it useful to know where and when funds flow. Diversified investors and traders often adopt this approach to perceive a strong trend. Here are a few examples of when you might want to use the Wyckoff Method.
Using BTC dominance to predict altcoin season
It’s not surprising that Bitcoin’s supremacy is falling apart in the face of a growing number of other cryptocurrencies. In recent years, the market capitalization of all altcoins has briefly surpassed that of Bitcoin due to the increased popularity of certain altcoins. When alternative cryptocurrencies often outperform Bitcoin, we call it undefined. According to the concepts of the Wyckoff Method, this type of price range from Bitcoin to altcoins takes place in cycles.
During an alt season, cryptocurrency alternatives tend to outperform Bitcoin, which could lead to a decline in Bitcoin’s market dominance. Bitcoin traders may want to keep an eye on its market share relative to other cryptocurrencies so they can make appropriate adjustments to their holdings.
Using BTC dominance with the modern Bitcoin price
Bitcoin market share and bitcoin price are two indicators that some investors use to guide their trading decisions. The following are only hypotheses and not rules, but they are consistent with numerous combinations of BTC price and dominance.
- An indication of a possible Bitcoin bull market is a rise in both BTC’s price and its market share.
- When Bitcoin’s price goes up but its market share goes down, it may be an indicator of a bull market in altcoins.
- When Bitcoin’s price drops while its market share increases, it may indicate a bear market in altcoins.
- The decline in BTC’s price and market share may portend a bear market for all cryptocurrencies.
- Historical evidence suggests a connection between these two criteria, but neither one by itself predicts whether the market will be bullish or bearish.
Conclusion:
Bitcoin’s (BTC) market share is a useful indicator of the current phase of the market cycle. Some investors use it to manage a diverse portfolio, while others use it to modify their trading strategies. Keep in mind that BTC dominance is just a guide to help traders plan their trading approach and is in no way a guarantee of the performance of Bitcoin or any other cryptocurrency.