TL;DR
Bitcoin dominance is a measure of bitcoin's market capitalization in proportion to the total of the entire cryptocurrency market. Some traders use the bitcoin dominance rate to adjust their trading strategies and portfolio structures.
Introduction
Bitcoin has now been in the spotlight for a number of years. It was the first cryptocurrency to be released and has since become the biggest digital asset by market capitalization. There are now thousands of altcoins out there, but bitcoin remains the largest cryptocurrency by market capitalization. Observing the dynamics of bitcoin's share in the value of the overall crypto market can be helpful to traders observing certain recurring patterns that predict future trends.
Some traders use Bitcoin dominance as a guide for their trading behavior. In particular, BTC dominance is thought to provide insight into the current general market trend..
BTC dominance and market capitalization
The market cap or total value of a crypto coin (or token) is calculated by multiplying the current price by the circulating supply.
You can calculate bitcoin dominance with this formula:
Bitcoin dominance = Bitcoin market cap/ Total cryptocurrency market cap
Factors influencing BTC dominance
Changing trends
When bitcoin first emerged into the public, it had almost no competition. It was the only show in town and everyone wanted to see what all the buzz was about. As more altcoins entered the scene, bitcoin’s dominance has diminished somewhat by losing some of its audience to other projects and assets.
It was not uncommon to see bitcoin's dominance hover above 90%. However, collectively, altcoins have gained more user and investor interest, reducing Bitcoin's overall market dominance.
The crypto space has evolved with new kinds of tokens, there are now utility tokens for gaming, NFTs, decentralized financial services beyond transferring money, and more. Depending on the current trend, there may be more interest and trading around a particular type of crypto project. This might cause Bitcoin dominance to drop in favor of the new trends.
Bitcoin, the oldest cryptocurrency in existence, has a long history of exhibiting strong stability and value. Over time, bitcoin has established itself as one of the more “stable” crypto assets. However, traders’ interest in more dramatic price swings and associated profit opportunities that some newer altcoins offer can also affect bitcoin dominance. The sectors these altcoins represent may not matter as much as the potential profits.
Bull or bear market
Over the last couple of years, there has been a general rise in the popularity of stablecoins, as many investors are looking to protect their funds amid falling prices. A stablecoin is an altcoin designed to maintain a value equal to that of an asset with a more stable price, such as a fiat currency or commodity. This has had a considerable amount of pressure on Bitcoin's dominance.
When an investor is looking to lock in profits, they can do so by exchanging their cryptocurrency for stablecoins such as Tether (USDT) or other popular stablecoins. When this happens, the BTC market dominance could go down.
In a bull market, traders can be rewarded for moving value from stablecoins into more volatile assets, this could affect Bitcoin’s market dominance. Some traders may choose riskier options and pump liquidity into altcoins that are even more volatile than BTC, which would affect BTC dominance.
On-ramping via stablecoins
Stablecoins are a great way to access a wide variety of cryptocurrencies compared to using fiat. But when the centralized gateways that exchange fiat for crypto restrict the currencies you can trade in and out of, there’s no other solution but to use stablecoins as a gateway for your crypto.
Crypto-to-crypto exchanges offer a way to bypass the issue of fiat exchanges by offering only cryptocurrency-to-cryptocurrency trading, allowing traders to buy and sell vast quantities of cryptocurrencies. Thus, if investors are in the market for specific cryptocurrencies, they can now jump on board with stablecoins.
The amount of money entering the crypto market through stablecoins and not bitcoin causes a dilution in BTC dominance. In other words, it makes bitcoin less dominant, and while increasing the overall value of the market.
The emergence of new coins
Bitcoin is the most popular and dominant cryptocurrency in the market at the moment. That said, there are other cryptocurrencies that can gain popularity quickly and affect bitcoin’s dominance. For example, if a new wave of altcoins emerges in popularity, investors may flock to that coin. However, there is a chance of the hype dying down for these altcoins. As a result, investors begin to move funds away from these altcoins (another kind of cryptocurrency) to bitcoin or out of the crypto market entirely, which may increase BTC dominance.
Using BTC dominance in trading
Wyckoff Method
Looking for a way to profit from the BTC dominance trend? Developed in the early 1930s, the Wyckoff Method is a set of principles designed for traders and investors in traditional financial markets. Professional traders use some of these principles such as the law of cause and effect. This can be applied when seeking profits using Bitcoin.
The Wyckoff trading method is a trend-following system that identifies market trends, estimates the likelihood of a trend reversal, and time trades. Wyckoff utilizes four phases of trading behavior to provide an objective way to trade.
Accumulation
Markup
Distribution
Markdown
The Wyckoff Method relies on identifying where and when funds flow in order to anticipate what the market will do next. Here are a few ways that traders and investors can use this approach to inform their trading strategy.
Using BTC dominance to spot altcoin season
The past couple of years has seen some dramatic changes in the cryptocurrency market. With a growing number of altcoins and increasing popularity, 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 where altcoins steadily outperform Bitcoin are known as "alt-season" or "altcoin season". Under Wyckoff Method such flow of funds from bitcoin to altcoins is cyclical.
Bitcoin may experience a decrease in its dominance during an altcoin season, as altcoins tend to do better during this phase of the market cycle. If you trade in both coins, monitor bitcoin's dominance to adjust your portfolio accordingly.
Using BTC dominance with the current bitcoin price
Some traders may monitor bitcoin's price and bitcoin dominance. 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.
Final Thoughts
BTC dominance is a useful indicator to see how the crypto market is performing. Some traders use it to adjust their trading strategies while others use it to help manage their diversified portfolios. BTC dominance does not guarantee the performance of BTC or any other crypto but is a tool trader can utilize to plan their trading approach.
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