Bitcoin Dominance Chart: The Main Benchmark in The Cryptocurrency Market
In 2022, the cryptocurrency market experienced many unpleasant events that forced investors to change their trading strategy. Among such incidents, for example, the infamous Terra (Luna) project, which collapsed in May, or one of the most famous cryptocurrency exchanges, FTX, which faced liquidity problems and had to shut down its operations. As a result, the capitalization of the global crypto market collapsed by more than 60% during the year, and the price of Bitcoin fell to its lowest level of two years ago. Nevertheless, all these adversities do not prevent Bitcoin from remaining the main cryptocurrency.
Due to the high demand for digital gold, changes in its price affect the entire crypto market. The main indicator used to determine investor sentiment in the crypto market, as well as to analyze the ratio of Bitcoin’s market capitalization to the market capitalization of all altcoins, is the Bitcoin dominance chart.
This article will cover the Bitcoin dominance chart and factors affecting its performance. In addition, we will explain how Bitcoin’s dominance indicator is related to the trend of the altcoin market. In the end, you will learn about the nuances of the practical application of the Bitcoin dominance chart in trading.
What is the Bitcoin Dominance Chart/Index?
The Bitcoin dominance chart (or Index) shows the share of Bitcoin’s capitalization in the cryptocurrency market. Previously, the main digital coin and several other altcoins from the top 5 boasted enormous market influence. However, as cryptocurrencies evolve, BTC dominance is declining. This is a good sign, as investors have begun looking at other assets.
As a rule, sudden news in the crypto world has a strong impact not only on the rate of the leading digital coin but also on altcoins. This year, Bitcoin’s dominance fell below the 40% mark for the first time since January as a result of a series of unfavorable events in the crypto industry. It should be noted that today investors need more confidence in the prospects of altcoins, and Bitcoin, according to analysts’ forecasts, after another fall, will go to the conquest of new peaks, although there are opposite forecasts.
The Bitcoin dominance index is often referred to by traders who use it to decide to either take positions in the Bitcoin market or move to the altcoin market. If the index is declining, we can conclude that investors favor altcoins; this often happens in a rising market. In the opposite case, if altcoins are actively selling, it may indicate investor fear and a desire to invest in less risky assets — i.e., Bitcoin.
Factors Impacting Bitcoin Dominance
Now that you know what the Bitcoin dominance index is, it’s time to consider the main factors that directly impact this indicator of the state of the crypto market.
Changing Market Trends
Every few years, the crypto market experiences a real boom: the turbulent financial flows rapidly form a mighty full-flowing river that feeds one of the innovative industries. In 2021, that industry was the blockchain industry. Cryptocurrencies, NFT, DeFi, virtual real estate — these promising segments are actively developing thanks to the “living water” of new investments. This frequent change of trends in the crypto space leads to the fact that Bitcoin’s value is sometimes in a precarious position and shifts towards altcoins.
Market Sentiment
Market sentiment is an assessment of traders’ attitudes toward a particular asset or investment. The way investors feel about cryptocurrency can have a tangible impact on market cycles and the price of cryptocurrency. If enough traders act on these ideas they share (whether or not they are based on real information), it could have a serious impact on Bitcoin’s dominance. A prime example of this is the Elon Musk tweets affecting the Bitcoin price (bullish sentiment).
While it is incorrect to say that Bitcoin dominance accurately represents a bear or bull market, there is a correlation between these definitions. For example, bull markets can decrease BTC dominance because funds tend to flow into altcoins at that time.
Altcoins
Changes in the value of altcoins have an effect on the Bitcoin dominance index. As altcoins increase and their prices rise, Bitcoin will begin to lose its market position. Generally, if Bitcoin dominance is rising, traders recommend holding more cryptocurrencies in BTC than in altcoins. If BTC dominance is declining, traders on the contrary recommend holding more altcoins than Bitcoins.
Stablecoins
Traders who want to trade certain assets can enter the market through stablecoins. With stablecoins, traders open up access to a broader selection of cryptocurrencies compared to fiat. If significant amounts of new funds enter the market through stablecoins rather than Bitcoin — then the overall value of the cryptocurrency market increases, and the dominance of BTC decreases.
Correlation of Bitcoin Dominance Chart and Altcoin Market Trend
The Bitcoin Dominance Index is an indicator of what share of the entire crypto market the leading cryptocurrency, BTC, holds. This indicator can help determine emerging trends in the industry as a whole. For example, during prolonged market spikes or corrections, the BTC dominance index can indicate whether demand for Bitcoin remains above the market average compared to altcoins.
Another major inference from the state of the dominance index is to determine whether altcoins are trending bearish or bullish, downward or upward relative to BTC.
The dominance index shows the following relationship between Bictoin dominance and the market trend of the altcoin market: When BTC dominance increases, altcoins generally depreciate relative to BTC. Viceversa, when BTC dominance decreases, altcoins generally appreciate relative to BTC.
In most cases, it is more profitable for traders to take a position in the BTC market when its dominance is in a bullish trend (bearish for altcoins) and then move the capital to the altcoin markets when BTC dominance holds a downtrend (upward for altcoins). However, this is an ideal situation, all other things being equal. With BTC prices trending downward, investors and traders tend to hedge their assets in dollars or stable coins (stablecoins) unless it is a conditional BTC downtrend when Bitcoin dominance is rapidly falling just because of altcoin price growth. This is a rare but possible scenario: from February to June 2017, in a super bull market, the level of BTC dominance fell from 86% to 38%, but during the same period, the asset price almost tripled.
It should be understood that an increase in dominance is only sometimes a positive indicator for Bitcoin. For example, in a strong bearish trend, the aggregate market capitalization of the industry can decline rapidly, with some investors and traders who do not exit the market entirely buying Bitcoin for altcoins. As a consequence, when the total market capitalization decreases, the share of BTC may even grow because the market capitalization of BTC is not dropping as fast. This trend is formed because Bitcoin is perceived as a “safe asset” in the crypto industry. But generally, such periods are bearish for both Bitcoin and altcoins.
Practical Use of Bitcoin Dominance Chart
Today there are several ways to use the BTC dominance index to determine the overall state of the crypto market, which is commonly divided into two general sectors: Bitcoin and Altcoins. This ratio is used to determine which of these two sectors is the stronger trend to trade, and we can also anticipate extreme readings and trade on reversals from highs and lows.
- Determination of the strongest trend
- Trade from highs and lows
Between 2018 and 2021, Bitcoin’s dominance ranged from a low of 35% to a high of 74%. Since the cryptocurrency universe is constantly expanding, it is unlikely that the value of this coefficient will significantly exceed 74% in the future. On the other hand, a dominance ratio below 35% suggests that the overall value of altcoins is rising rapidly compared to Bitcoin.
When the ratio approaches these historical levels, there is a risk of a ratio reversal. Therefore, when the ratio reaches extremes, the markets are ripe for a drop in the ratio. On the other hand, extremely low ratios can lead to increased Bitcoin dominance. The bottom line is that investors will judge the value of a cryptocurrency by its peers. If investments have been pouring into altcoins for some time, Bitcoin’s upside and value potential may be more likely.
Conclusion
Bitcoin’s dominance is the most important benchmark of the crypto market that reflects the market’s sentiment, so traders and investors can use this index to identify its trends. Such an index is just one of many possible indicators describing the current market environment. It is possible that in the future, the ratio will become less and less, and this index may lose its practicality, and altcoins will no longer be as dependent on the Bitcoin price.
