Bitcoin dominance (BTCD) simply refers to the percentage of market capitalization accounted for by Bitcoin amongst all the cryptocurrencies. In other words, it is measuring the Bitcoin market cap compared to the total crypto market cap. Bitcoin dominance is a key metric in the crypto space to determine both Bitcoin influence and market share within the ecosystem.
History of Bitcoin dominance
At one point in time, Bitcoin was the only cryptocurrency, and it had a dominance of 100%. This has led to a gradual reduction in Bitcoinâs dominance, which fluctuated over time as more and new altcoins (alternative cryptocurrencies such as Ethereum, Ripple, Litecoin, etc.) were introduced.
Early Years: During the first few years of its existence, Bitcoin was in dominance over 90%, almost all throughout, representing a market that leaned heavily towards Bitcoin.
Decreased Dominance: Bitcoin lost a substantial part of its dominance as new altcoins began growing in popularity, with BTC approaching the 35% mark by early 2018â thanks to Ethereum and ICO (Initial Coin Offering) projects.
Recent Conditions: Over the years, Bitcoin dominance has moved between about 40% and 70%, depending on macro conditions and sentiment patterns of altcoin outperformance.
How to Use Bitcoin Dominance in Crypto Trading?
It is an essential parameter in cryptocurrencies trading activities to predict market trends and make appropriate decisions. Below are some of the ways that traders and investors can imbibe Bitcoin dominance in their trading decisions :
1. Market Sentiment Analysis
High Bitcoin Dominance : A high bitcoin dominance number generally means that the market is more confident in $BTC over alts. The situation is common in bear markets or uncertain times where investors favor the relatively âsafe havenâ of Bitcoin.
Low Bitcoin Dominance: When Bitcoin dominance is going down, it means the altcoins are doing better than bitcoin, as is often prevalent in bull markets or if there are a host of new promising projects ranging from DeFi, NFT tokens, etc. This decreasing dominancy is a sign that investors are turning more risky, and money exiting BTC will go into altcoins.
2. Identifying Altcoin Seasons
Altcoin Season (Altseason): An âaltcoin seasonâ involves a decrease in Bitcoin dominance as the value of altcoins rises, moving up on top of their performance against BTC. Many traders keep an eye on Bitcoin dominance as a signal that perhaps an altseason is beginning. In such periods, altcoins can give a higher ROI than Bitcoin, so more trading activity and investment will flow to altcoins.
Transition Phases: If Bitcoin dominance stabilizes or begins increasing either after a point of decline, it could potentially signal the end of an altseason. This could be a signal to allocate less investment into altcoins and more back in Bitcoin.
3. Strategically Capital Allocation
Portfolio Allocation: Traders use the Bitcoin Dominance chart to decide how much of their fund they should favor on altcoins. If Bitcoin dominance is increasing, they may increase their exposure to BTC. On the other hand, if Bitcoin dominance is weakening, they may start looking to diversify into altcoins in search of better returns.
Risk Management: More often than not, high bitcoin dominance means that the market is risk averse and traders are moving into bitcoin as opposed to smaller-cap altcoins, which come with more volatility.
4. Confirmation of Market Trends
Bullish/Bearish Confirmation: Bitcoin Dominance can also serve as a way to confirm the trend of other technical indicators in which more positive/negative price sentiment will equate to increasing/decreasing levels. If, for example, the price of Bitcoin is rising and also its dominance, this refers back to a very bullish trend in terms of bitcoin. However, if Bitcoin is losing value and gaining in terms of dominance points at a weakening crypto market.
5. Reversals to Search For
Bitcoin dominance has a potential reversal signal mechanism in place where sharp moves are indications of possible market reversals. If, for example, Bitcoin dominance experiences a major decline and then suddenly ramps to the upside, it could suggest traders are shifting money into bitcoin, preparing itself for either an altcoin correction or overall market devaluation.
Bitcoin Dominance is a helpful metric through which market sentiment, potential trends, and trade decisions can be assessed. However, you should combine it with other market indicators and analytics methods to make your crypto analysis better and safer.
