It is always said in the world of crypto that Bitcoin #BTC leads the entire market, so if it rises, the market rises, and if it falls, the market falls. For this reason, focusing on Bitcoin's movement and direction has become so important that a Bitcoin dominance indicator has been developed to measure the extent of Bitcoin's dominance over the market. What is this indicator? What do the ratios of this indicator mean? Is it possible to predict market movements through it? Let's find out
Bitcoin dominance indicator
In order for any financial asset in the world to grow, it must attract capital, and the more capital the financial asset attracts, the faster it will grow. Based on this, Bitcoin’s dominance in the crypto world simply means the amount of capital entering Bitcoin compared to the rest of the crypto market. On the Trading View platform, you will find this indicator called BTC.D, and you can search for it and use it easily.
In the chart below you can find an example of this indicator at the monthly level, meaning that each candle represents a month
Note that the index level is currently at 56.43%, which means that Bitcoin’s share of capital in the entire crypto market is 56%. This means that more than half of the capital entering crypto is allocated to Bitcoin. That is, for every dollar invested in crypto, at least half of it is invested in Bitcoin.
Notice also how several years ago this indicator was at the 100% point and began to decline violently. This is because about ten years ago there were no currencies in the crypto market except Bitcoin. Thus all capital was invested in Bitcoin. But after the currencies began to appear, the share of Bitcoin began to decrease and thus began to decline.
This ultimately led to a violent decline in this indicator around the year 2017, during which the launch of new digital currencies became widespread, especially through ICOs. Note also that from this time until now Bitcoin's dominance has been steadily declining due to the presence of many alternative currencies in the market that are withdrawing capital.
What does the Bitcoin dominance index mean?
Through Bitcoin's dominance of the market, you can know the nature of growth in the market. For example, the index is currently at 56%, which is a high percentage. Therefore, this means that the percentage or opportunity for growth of alternative currencies, which is any other currency except Bitcoin, is rather low.
Therefore, through the dominance index, we can predict capital movements in the market. If the indicator is as high as it is now, we can almost be certain that the majority of growth in the market will be directed in the direction of Bitcoin. However, if the percentage of this indicator decreases and falls below 50%, as happened in previous years, this is known as the altcoin season. This is simply because now the majority of capital entering the crypto world is directed towards alternative currencies and not Bitcoin.
How can the index be calculated?
You can calculate the Bitcoin dominance index yourself, but to do this you have to use another indicator, which is Total. This indicator is also available on TradingView. This indicator is the total market value of the entire crypto market, that is, it calculates the volume of all capital invested in the market.
If we look at this indicator now, we will find that it indicates $2.3 trillion.
This means that the total money invested on all blockchain networks, including Bitcoin, Ethereum, Solana, and others, represents $2.3 trillion. If you calculate the market value of Bitcoin, which is currently estimated at $1.3 trillion, you can, by performing a simple calculation, know the percentage of Bitcoin’s dominance in the market.
Please also note that on the TradingView platform you will find several indicator comparisons named Total2 and Total3. Total2 represents the entire crypto market except Bitcoin, while Total3 represents the entire crypto market except Bitcoin and Ethereum. You must know the difference between them in order to analyze the market appropriately.
What are the reasons for the rise in Bitcoin dominance?
Now you know what the Bitcoin dominance index is and how to calculate it, but what are the reasons that may lead to its increase?
You will always notice that the indicator rises at the beginning of a bull market and the end of a bear market. After this, it begins to rise strongly during the Bitcoin price recovery phase. This indicator increases in particular at times of severe crises, such as the Luna crisis and the collapse of Silvergate Bank in March 2023.
In the chart above, you can see in the blue circles on the left the Luna collapse crisis and on the right the banking crisis in March 2023. Each time notice that Bitcoin begins to rise violently because it is considered a safe haven in times of crises. After this, the index begins to rise continuously until it reaches the peak stage in the bull market. After this, the index begins to decline when the altcoin season begins.
Note also that this year the dominance index has risen sharply due to the launch of Bitcoin investment funds, which have increased the importance of Bitcoin in the market by a significant amount. This year, we expect that this indicator may exceed 60% before it begins to correct and decline slightly. It is not a requirement that it exceed 60%, as the index has been rising continuously for a long time without any price correction, and therefore it can be subject to a correction at any time.
You must also understand that the rise of Bitcoin does not necessarily mean the rise of alternative currencies, and this is because all capital may be in the interest of Bitcoin only in placing other currencies. Therefore monitoring this indicator is very important.
Reasons for the decline in the Bitcoin dominance index
As for the reasons for the decline in the Bitcoin dominance index, this usually occurs at certain times. You can clearly identify this period in the image below. Look at the chart to understand more. This chart is based on the weekly level of the dominance index.
The violent decline on the left was at the end of 2020 and the beginning of 2021 in the bull market. It was after Bitcoin rose very violently from $3,000 to above $40,000. This means that the dominance index usually falls after the price of Bitcoin explodes upwards. When an investor feels that there is no room for Bitcoin to grow again, he starts investing in Ethereum, Solana, and alternative currencies. Therefore, the majority of new capital enters these currencies and not Bitcoin. But this does not mean at all that the price of Bitcoin will decrease, only that it will slow down its growth
On the right you can see the indicator falling again but not as violently. This was in June 2022 after the highest US inflation reading in many years was announced. Consequently, Bitcoin's dominance began to decline as the market began to take risks after Bitcoin took shelter from the risks of inflation and the decline of the Luna coin in May 2022.
Sometimes the decline of this indicator is due to major disasters and therefore does not mean investors exiting Bitcoin to enter into alternative currencies but into stable currencies such as USDT. This is for the purpose of preserving capital until a clear market trend appears.