For many, Bitcoin is considered to have the most market share in the cryptomarket. However, that is not always true. There are times when bitcoin market share decreases. In this article, we will discuss what indicator analyzes this market share movement also known as market dominance.
The indicator that analyzes Bitcoin market share is called Bitcoin Dominance (BTC.D). It compares total market capitalization in comparison with market share of bitcoin for reporting. One surprising fact about this indicator is that it is an under-rated metric and rarely used in mainstream reporting of cryptocurrencies.
However, understanding Bitcoin Dominance offers valuable insights into market trends and helps shape our trading strategies.
What is Bitcoin Dominance?
In simple terms, Bitcoin Dominance refers to the percentage share of Bitcoin market share in relation to the total market of all cryptocurrencies.
In other words, it measures how much of the total value of the cryptocurrency market is held in Bitcoin compared to other cryptocurrencies (commonly referred to as altcoins).
The formula for Bitcoin Dominance is:
Bitcoin Dominance = (Market Cap of Bitcoin / Total Market Cap of All Cryptocurrencies) × 100
Why is Bitcoin Dominance Important?
Bitcoin Dominance helps traders and investors understand the market sentiments based on the dominance report.
When Bitcoin Dominance is high, Bitcoin holds a more significant portion of the market’s overall value. When it’s low, it means that altcoins are gaining ground and taking up a larger share of the market. This means that due to the Bitcoin Dominance their trading strategies can get influenced and the outcomes can vary. Therefore, while making a trade, it is important that Bitcoin Dominance is factored in.
What Factors Influence Bitcoin Dominance?
There are a few factors that influence Bitcoin Dominance directly and some that do it indirectly. We are listing all of these down so that you can use them when entering trades next time.
1. Market Sentiment
Market Sentiment is an obvious factor and can directly impact Bitcoin dominance. During uncertain times when the market is bearish, most investors convert their altcoins into bitcoin to make sure that they can rise back up. Bitcoin is a more secure and stable cryptocurrency in comparison with other altcoins so moving funds to this currency makes sense for many traders out there.
However, when more people start relying on Bitcoin in comparison with Altcoins for their funds, the market sentiments will shift in favor of Bitcoin. This will increase the market share or the Bitcoin Dominance.
Similar but opposite thing happens during a bullish market. Due to bullish trends, investors are more likely to explore altcoins, hoping for higher returns. This causes Bitcoin Dominance to decrease as capital flows into other crypto assets.
2. Altcoin Performance
Altcoin performance also directly impacts Bitcoin Dominance. When altcoins experience a surge in popularity due to any factor such as technological innovation, speculative interest, or new trends —they can capture a larger share of the market, leading to a decrease in Bitcoin Dominance.
3. Market Cycles
In crypto, we have two major market cycles also called "Bitcoin seasons" and "Altcoin seasons." During a Bitcoin season, Bitcoin typically outperforms the broader market, and its dominance increases. This often happens during the early stages of a bull market when Bitcoin attracts the most attention. Since the coin is known to steer the market, people invest in Bitcoin to reap profits from the bullish cycle. This increases Bitcoin dominance.
Once the bullish pattern is stabilizing, altcoins increase in value. During an Altcoin season, altcoins outperform Bitcoin, and their market capitalization grows faster than Bitcoin's. This causes Bitcoin Dominance to decline as more funds are allocated to altcoins.
4. New Crypto Innovations
Like market sentiments, bitcoin dominance can also get impacted by the emergence of new crypto sectors such as DeFi, NFT, AI and other coin segments.
Similarly, change in technology from ETH based coins to SOL based coins and moving from Layer 1 to Layer 2 solutions can also shift Bitcoin market dominance.
How to Use Bitcoin Dominance in Crypto Trading
This is one of the most asked questions in the crypto industry by beginners.
For starters, Bitcoin Dominance isn’t just a metric to observe—it’s a tool that can help shape your trading strategies.
When you understand the trends in Bitcoin Dominance, you can make more informed decisions about when to invest in Bitcoin or altcoins.
Here’s how you can use Bitcoin Dominance in your crypto trading strategy:
1. Identifying Market Trends
One of the most obvious reasons to check Bitcoin dominance is to know how the market is performing. If bitcoin dominance is increasing it means that you should be investing in Bitcoin and not altcoins.
Similarly, if it is decreasing then that simply means that people are shying away from investing in Bitcoin and looking for alternative coin options that can give them more profits in the short term.
2. Indicating Market Uncertainties
Bitcoin is often considered a stable cryptocurrency just like Gold in the real world currencies.
The bitcoin dominance pattern can tell if the market is bearish and bullish. If the bitcoin dominance share is more in comparison with other currencies it means people are not making risky decisions.
Similarly, the opposite is true when the market sentiment is positive and altcoins have more share in the bitcoin market dominance report.
3. Timing Altcoin Investments
One more interesting use case of Bitcoin dominance is to understand when to invest in altcoins. For example, when Bitcoin Dominance is very high, it could mean that altcoins are undervalued, presenting a buying opportunity. Conversely, when Bitcoin Dominance is very low, it could suggest that the altcoin market is overheated, signaling a good time to take profits or avoid new altcoin investments.
4. Investment Opportunities
Traders can also use Bitcoin Dominance to adjust their portfolio allocation between Bitcoin and altcoins.
When Bitcoin Dominance is high traders might allocate more of their portfolio to Bitcoin to reduce risk and protect their capital. Conversely, during periods of declining dominance, they might allocate more to altcoins to capture potential gains.
In summary, Bitcoin Dominance is a powerful indicator that provides insight into market trends, investor sentiments, and investment opportunities in the cryptocurrency space.
By monitoring Bitcoin Dominance, traders can make more informed decisions, optimize their portfolio allocation, and better navigate the cyclical nature of the crypto market.
Whether you’re focused on Bitcoin, altcoins, or a mix of both, Bitcoin Dominance should be an integral part of your trading strategy.
To dive deeper into this concept, check out this comprehensive Bitcoin Dominance guide from Binance Academy.
