TL;DR
Bitcoin dominance, or BTC dominance, is measured as the ratio of the market capitalization of bitcoin to that of the rest of the cryptocurrency market. Some crypto investors and traders use bitcoin dominance as a guide to adjust their trading strategies and portfolio structures.
Introduction
While there are now thousands of altcoins out there, bitcoin, the original cryptocurrency, has remained the largest digital asset by market capitalization. Observing the dynamics of bitcoin’s share in the value of the overall crypto market, traders have spotted certain recurring patterns of market conditions. Some came to use BTC dominance as a guide for their trading behavior. In particular, BTC dominance is believed to offer insight into the current general market trend.
BTC dominance and market capitalization
In simple terms, market capitalization refers to the total value of a certain asset in circulation. For bitcoin, the market cap is calculated by multiplying the current price and the number of BTC that have been mined so far.
You can calculate bitcoin dominance with this formula:
Bitcoin dominance = Bitcoin market cap/ Total cryptocurrency market cap
Factors influencing BTC dominance
Changing trends
Before the explosion of altcoins, it was not uncommon for bitcoin dominance to hover above 90%. As altcoins collectively gained more user and investor interest, bitcoin lost some of this almost undivided attention to other assets with greater price swings and projects boasting new exciting use cases.
While bitcoin was created to change how the transfer of value worked, crypto projects have evolved to do more. Unlike bitcoin, many altcoins are involved in different sectors, including gaming, art, and decentralized financial services beyond transferring money. Depending on the current trend, there may be more interest and trading around a particular type of crypto project. For instance, the explosion of NFTs may have caused BTC dominance to drop somewhat in favor of NFT-related tokens.
Over time, bitcoin has established itself as one of the more “stable” crypto assets. Traders’ interest in more dramatic price swings and associated profit opportunities that some newer altcoins offer can also affect bitcoin dominance, leading to funds flowing into riskier assets. In this case, the sectors these altcoins represent may not matter as much as the potential profits.
Bull or bear market
Over the last several years, there has been a general rise in the popularity of stablecoins, a trend that exerted sustained pressure on BTC dominance. More specifically, in a bear market or in times of volatility, stablecoins are often used to protect crypto investors’ funds amid falling prices. A stablecoin is an altcoin designed to maintain value equal to that of an asset with a more stable price, such as a fiat currency or commodity. Crypto investors and traders often use stablecoins to lock in profits without having to convert their crypto to fiat. When funds move out of the BTC market and into stablecoins, BTC dominance could go down.
The inverse is likely in a bull market. When the market is up, traders can be incentivized to move value from stablecoins into more volatile assets that offer more trading opportunities, like bitcoin. However, emboldened traders may also choose riskier options and pump liquidity into altcoins that are even more volatile than BTC, so the overall effects of favorable market conditions on bitcoin dominance are highly context-dependent.
On-ramping via stablecoins
Stablecoins offer a convenient way to access a wide variety of cryptocurrencies compared to using fiat. This is because while there are fiat-to-crypto exchanges called gateway exchanges, they can be restrictive and only offer the more popular cryptocurrencies and stablecoins. Crypto-to-crypto exchanges, however, often provide a more comprehensive selection of cryptocurrencies tradable with select stablecoins. Hence, people who want to trade specific cryptocurrencies may enter the market via stablecoins. Naturally, if a significant amount of new funds enter the market through stablecoins and not bitcoin, the total value of the crypto market increases, causing a dilution in BTC dominance.
Emergence of new coins
Sometimes, new coins that enter the market can gain popularity quickly, causing BTC dominance to decrease. Remember that bitcoin is “fighting” with every other cryptocurrency in the market, so the emergence of several popular altcoins at once may affect it. However, there’s a chance that these altcoins may lose popularity after the hype dies down. If that happens and funds are moved from these altcoins to BTC or out of the crypto market entirely, BTC dominance may rise again.
Using BTC dominance in trading
Wyckoff Method
Developed in the early 1930s, the Wyckoff Method is a set of principles designed for traders and investors in traditional financial markets. Some of these principles, such as the law of cause and effect, can be applied when seeking profit opportunities using BTC dominance.
Many traders and investors use the Wyckoff Method to identify a market trend, estimate the likelihood of a trend reversal, and time trades. According to Wyckoff, trading behavior is organized into four phases: Accumulation, markup, distribution, and markdown. Identifying where and when funds flow can be important for some traders who rely on timing the market to make informed trading decisions.
Diversified traders and investors often use this approach to pick the stronger trend. Below are several scenarios where the Wyckoff Method is at play.
Using BTC dominance to spot altcoin season
With the increasing number of altcoins in the market, it is unsurprising that bitcoin dominance is being diluted. In recent years, some altcoins have gained more popularity, causing the total market cap of all altcoins to briefly surpass that of bitcoin. Periods when altcoins steadily outperform bitcoin are known as “altcoin season” or “alt season.” Under the Wyckoff Method principles, such movement of funds from bitcoin to altcoins is cyclical.
Because altcoins tend to perform better during an altcoin season, bitcoin may see its dominance weaken during this phase of the market cycle. Therefore, people who trade both bitcoin and altcoins may monitor bitcoin dominance to adjust their portfolios accordingly.
Using BTC dominance with current bitcoin price
Some people monitor bitcoin price along with bitcoin dominance to help them make trading decisions. Although they are not iron laws, here are some potential outcomes that various combinations of BTC price and dominance may be indicative of.
When the price and dominance of BTC are rising, it could signal a potential bitcoin bull market.
When the price of BTC is rising but BTC dominance is falling, it could signal a potential altcoin bull market.
When the price of BTC is falling but BTC dominance is rising, it could signal a potential altcoin bear market.
When the price and dominance of BTC are falling, it could signal a potential bear trend for the entire crypto market.
While these two factors do not imply a definite bull or bear market, historical observations suggest a correlation.
Closing thoughts
BTC dominance is a tool to help shed light on how the market cycles are changing. Some traders use it to adjust their trading strategies, while others use it to manage their diversified portfolios. Note that BTC dominance does not guarantee the performance of bitcoin or any other crypto but acts as a guide to help traders plan their trading approach.