Dominance of Bitcoin (BTC) and How It Affects Cryptocurrency TradingTable of Contents
Dominance of Bitcoin (BTC) and How It Affects Cryptocurrency Trading
By CoinUnited.io Research Team
3 min read
Let's start with market cap in order to have a better idea of Bitcoin dominance. It is possible to determine the overall market value of a cryptocurrency by multiplying the quantity of coins or tokens in circulation by the price at which they are currently trading.
By dividing the market capitalization of all cryptocurrencies by the market capitalization of Bitcoin, one may determine the percentage worth of the cryptocurrency's dominance.
The value of Bitcoin in relation to the whole cryptocurrency market is determined by this ratio.
In its calculations, B Cap dominance takes into account both the market capitalization of Bitcoin and the whole cryptocurrency market.
The BTC coin market cap (left chart), the entire cryptocurrency market cap (middle chart), and the BTC coin dominance (right chart) are all visible. In general, the whole crypto market cap will resemble and move in the same direction as the B coin market. This is mainly because Bitcoin, the first, biggest, and most well-known cryptocurrency, has a significant effect on the whole crypto market. Because Bitcoin is the most widely used cryptocurrency, when consumers want to enter the market, they usually start by purchasing it.
Since then, its number has undergone significant fluctuations.
The numerator of the Bitcoin dominance ratio is the market capitalization of Bitcoin. The price of bitcoin has the most impact on its market capitalization since there are only 21 million bitcoins that can be mined, which keeps the number of bitcoins in circulation largely constant.
The graph above shows the correlation between the price of Bitcoin and its market capitalization. Take note of how closely the market cap tracks and mirrors the price fluctuation of B coin. The market capitalization of Bitcoin increases according to its price trending higher.
But just because Bitcoin's market cap is rising doesn't always suggest that its dominance is growing. The ratio's numerator is just the market capitalization of bitcoin. The second-largest factor influencing the ratio, the market cap of altcoins, is compared to the rate of change of Bitcoin's market cap.
Altcoins are built for a considerably wider range of use cases than Bitcoin, which was designed to allow peer-to-peer payment. Decentralized finance (DeFi), non-fungible tokens (NFTs), or real-world assets are a few examples of altcoin use cases.
Increasing Use of Stablecoin More consumers are entering the cryptocurrency market as a result of the minting of stablecoins like USDC, USDT, and BUSD as the demand for cryptocurrencies rises. When these stablecoins are issued, their market caps rise, which raises the overall market cap of all altcoins.
Additionally, users may decide to take a profit and keep their cap value in stablecoins under erratic market circumstances. They may also keep their currencies in the form of stablecoins to prepare for deployment into the markets, which would reduce BTC cap dominance.
Market Situation Bear or Bull Because users are typically more risk-averse and speculative during bull markets, they invest their coin cap into altcoins to profit from the price increases, which results in a decline in bitcoin dominance.
On the other hand, during a bear market, consumers may decide to convert their assets into Bitcoin, viewing it as a type of safe haven.
The market capitalization of altcoins naturally rises as new cryptocurrencies are developed and introduced to the cryptocurrency market. Therefore, once new cryptocurrencies are introduced, Bitcoin's dominance will be slightly reduced.
To find trading opportunities, you may determine which category has a stronger trend by studying the ratio between Bitcoin and altcoins.
After Bitcoin has seen a big gain in price, investors frequently want to invest their winnings in other cryptocurrencies, which starts the Alt Coin Season.
First, ascertain the dominance trend of BTC.
Next, find the price trend of the B it coin over the same time frame.
Finally, you may utilize this table to identify a strategic bias.
Using price action, candlestick patterns, and/or other technical indicators, you can spot trade opportunities after the bias has been formed.
The dominance of Bitcoin fluctuated between a high of 75% and a low of 35% during 2017 (the ICO boom) and 2021 (the DeFi Summer).
There may be a belief that BTC's price will drop shortly when Bitcoin dominance approaches 75%. On the other hand, you may anticipate an impending change in B coin price movement to the upside when Bitcoin dominance declines or falls close to historically low levels.
When the ratio does, however, reach extremely high levels, it might present some favorable trading chances.
2009–2016 The cryptocurrency market was still limited and there were only a few cryptocurrencies accessible in 2009 when Bitcoin was initially introduced. At that time, the B it coin dominance was almost 99%. The dominance of Bitcoin fell to 94% in 2013—four years after it first appeared—as new cryptocurrencies entered the market. 2017–2018 As a result of the price surge of Ethereum in 2017, which sparked a boom in initial coin offerings (ICOs), hundreds more cryptocurrencies entered the market, and things underwent a significant change. Given the extensive market involvement in such ICOs, this rise in the market capitalization of altcoins was further amplified. The market cap of altcoins skyrocketed in response to rising cryptocurrency prices (caused by increased user demand), reducing Bitcoin's dominance to 38% in 2018. 2019–2020 A bear market developed as a result of the sharp decline in Bitcoin's market share. The market cap of altcoins decreased with the demise of several of the ICO boom's altcoins. As a safe haven in the bear market, many investors switched their money back into Bitcoin in the meantime. The return of Bitcoin's dominance was facilitated by these market circumstances. 2021 When DeFi Summer hit in 2021, traders began to move their capital into altcoins due to the returns that market offered. As a result, the market cap of altcoins rose dramatically, dropping Bitcoin's dominance to below 50%. 2022 The dominance of Bitcoin in 2022 was anywhere between 40% and 50%. The market nevertheless had the majority of their capital allocated to such yield-generating cryptocurrencies due to the utility brought forth by altcoins, including real world assets (RWA) and DeFi apps like GMX. Because of this, the capital virtually ever rotated back into Bitcoin, which caused its dominance to be mostly stable.
Despite being a widely used indicator, Bitcoin or coin dominance has garnered some criticism.
As was previously indicated, there is a declining trend in the dominance of Bitcoin when new crypto currencies are introduced. There have been concerns raised about the long-term viability of Bitcoin dominance given that new protocols and initiatives are constantly being developed and launched.
There have been worries that the market capitalization of bitcoin is significantly smaller than estimated. This is due to the possibility that some of the Bitcoin supply has been lost or is now dormant in old wallets.
It's not advised that you base your trading strategy entirely on Bitcoin dominance given the intricacy of the cryptocurrency market. You might be able to better spot market patterns by combining Bitcoin dominance with other indicators.
An important tool for people to utilize to comprehend market movements in cryptocurrency is the bitcoin dominance ratio. You may be able to spot market patterns and choose a trading strategy by examining the Bitcoin dominance ratio together with Bitcoin pricing. There are certain drawbacks to adopting the Bitcoin dominance indicator, as was previously discussed. To better spot market patterns and trade possibilities, think about combining this indicator with others.
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