What Is Bitcoin Dominance (BTCD) and How to Use BTCD in Trading

While Bitcoin has fallen from around $47K to roughly $20K over the past year, few things remained constant. For starters, Bitcoin is still the largest cryptocurrency by market capitalization. Second, Bitcoin dominance remained around 40%, despite the drawdown in price. This is because as the crypto winter drags on, investors tend to hold safer assets like stablecoins and blue chips crypto assets, such as Bitcoin and Ethereum.

Source: https://coinmarketcap.com/currencies/bitcoin/

Only when altcoins start moving in unison can they gain meaningful ground against the reigning king of crypto: Bitcoin. This happened at the start of 2021 amidst a bull market, which saw Bitcoin dominance fall from around 70% to 40%.

Source: https://coinmarketcap.com/charts/

In the past years, traders have studied the dynamics of Bitcoins market share to understand the driving forces behind it, and whether it can be used to allocate capital more efficiently.

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What Is Bitcoin Dominance?

Bitcoin dominance, BTC dominance or just BTCD is used to measure the ratio between Bitcoin’s market cap and the market cap of the entire cryptocurrency market. Traders have found ways to use this metric to predict bull markets, altcoin seasons and bitcoin rallies well before they started.

For example, a sharp correction in Bitcoin dominance, even though Bitcoin’s price is climbing, could likely tell you that an altcoin season is well underway.

History of Bitcoin Dominance

The cryptocurrency market has not always been as big as it is today, nor has it always counted so many different tokens. CoinMarketCap lists a total of 22,316 tokens at the time of writing!

In the years that followed Bitcoin’s genesis, a few altcoins were launched, such as Litecoin, Dogecoin, Peercoin and Namecoin. The fact that the last two are not around anymore did not discourage developers from launching new projects. There are now thousands of altcoins, many of which you and I both have never heard of.

With the ICO craze in 2017’s bull market, new altcoin tokens flooded the market to the point that Bitcoin’s dominance saw a major decline, dropping from 90% all the way to 37% in January 2018.

From this point, a bear market hit, and many of the newly launched tokens disappeared. Bitcoin slowly reclaimed its market share but peaked at about 72% in January 2021. The bull market of 2021 saw another wave of new altcoins hit the market, while older altcoins also rose in value significantly. This drove the dominance metric back down to 2018 levels, where it still hovers today.

Relation of BTC Dominance With Market Capitalization

There is a strong relationship between market capitalization and Bitcoin dominance. Even though Bitcoins dominance is near its all-time low, it still controls the overall direction of the market. Altcoins still have a hard time rallying when Bitcoin’s price takes a nosedive. Bitcoin is still considered a barometer of the crypto market. Let’s dive into some factors that influence the BTC Dominance.

What Factors Influence BTC Dominance?

As mentioned earlier, Bitcoin’s market cap used to be over 90 percent of the entire crypto market. As more altcoins entered the space, Bitcoin’s influence on the market naturally decreased, but is still significant today. What other factors influence Bitcoin’s dominance?

If we look at the calculation of Bitcoin’s dominance, there are two main components: the market cap of Bitcoin, and the market cap of altcoins.

Bitcoin’s Fluctuation in Price

Because the number of Bitcoins in existence grows slowly, BTC market cap is mostly influenced by its price action. The easiest way for Bitcoin’s market capitalization to increase is when the price of bitcoin goes higher.

Altcoins Fluctuation in Market Cap

Contrary to Bitcoin’s market cap, the total altcoin market cap is a little trickier to calculate. With thousands of altcoins to track, and new ones being launched each day, this is not a calculation you do by hand. Luckily, websites like CoinMarketCap calculate this number for you.

These two factors combine to determine BTCD. It is not enough just to look at the movement of both market caps. Instead, we must analyze which market cap is winning terrain against the other. Thus, BTC dominance can be summarized as a tug-of-war between altcoins and Bitcoin.

But there’s more! Market conditions, on-ramping via stablecoins, changing trends and new coins and projects all influence the bitcoin dominance in one way or another.

Bull or Bear Market

A major influencer of Bitcoins dominance is the overall condition of the market. Bitcoin’s dominance generally increases during bear markets, whereas it loses ground during a bull market. This is because crypto investors consider Bitcoin a safe haven, whereas altcoins are more speculative in nature.

On-Ramping Via Stablecoins

Stablecoins such as USDC, BUSD and USDT see their market capitalization increase because more money enters the space. New stablecoins are minted frequently, because of this increased demand. As stablecoin supplies increase, so does the market cap of this sector of coins, adding to the total altcoin market capitalisation.

Changing Trends and Narratives

A great example of why trends can influence Bitcoin’s dominance can be found in the DeFi summers of 2020 and 2021. During these summers, the DeFi sector performed incredibly, with many tokens doubling prices in mere weeks, even when the rest of the market was relatively dull. This rally sent the total altcoin market cap higher, pushing Bitcoin’s dominance down.

New Coins and Projects

Finally, an obvious factor is the number of new tokens and projects being launched in the market. Every new project or token launch boosts the market share of altcoins by a tiny bit. This makes the dominance metric inherently trending down, as the overall crypto industry grows.

How to Use BTC Dominance in Trading

Identifying Altcoin Season

As discussed earlier, DeFi summer caused Bitcoin’s dominance to drop. The same thing happens during altcoin seasons. Monitoring Bitcoins dominance can therefore give you early signals of a starting altcoin season, allowing you to allocate your funds to promising altcoins before they start running, maximising your profit potential.

When the dominance starts to reclaim ground, it is time to swap your altcoin positions back to BTC and wait for the next altcoin season.

Spot the Strongest Trend

Traders can also monitor Bitcoins dominance in combination with Bitcoin’s price behaviour to derive trading signals.

For example, when both price and bitcoin dominance rise, traders tend to flock to Bitcoin, as it is the strongest horse in the race. On the other hand, when Bitcoin’s price increases, but the dominance metric falls, it suggests altcoin season is in full force.

The opposite is true for when Bitcoin is falling while the dominance rises, it shows an altcoin bear market. Finally, when Bitcoin and its dominance are falling in unison, the entire crypto market is in a bear trend.

These patterns in price and dominance are not definite but can be indicative of strength.

Manage Risk

Bitcoin dominance can also be used to manage your risks. For example, when bitcoin dominance goes on a rally, traders can decide against buying altcoins for the foreseeable future, to protect their hard-earned capital.

How to Chart Bitcoin Dominance on TradingView

The Bitcoin dominance chart can be found on tradingview by searching for BTC dominance or BTC.D. Similarly, users can find the Ethereum or USDT Dominance, which can yield interesting observations as well.

Bitcoin Dominance Index Criticisms

Although popular, the Bitcoin dominance metric gets its fair share of criticisms. Opponents of the metric cite the flaws of market capitalization metrics and the ever-increasing supply of altcoins as reasons why the dominance metric is inherently flawed.

Increased Supply

As mentioned earlier, the seemingly never-ending supply of freshly minted altcoins puts pressure on bitcoin dominance. Critics use this inflow of new altcoins to question the value of a dominance metric that – in their view – will always trend down.

Market Cap Shortcomings

These same critics often discuss the shortcomings of market capitalization metrics, which is commonly calculated by multiplying the token value by the number of tokens in circulation. This is where their quarrel with the metric lies, as many BTC have been lost in forgotten wallets, or sits abandoned elsewhere.

Their argument is that the true market capitalisation of Bitcoin (and alts) may therefore be much lower.

Closing Thoughts

This concludes the explainer on Bitcoin dominance, what it means, and how to use it to your advantage. There are reasons to incorporate the metric in your analysis, and reasons not to.

As always, it is important to do your own research before investing your hard-earned money; never invest more than you can afford to lose. Trading is risky and letting other people do it for you may do more harm than good.

Writer’s Disclaimer: This article is based on my limited knowledge and experience. It has been written for educational purposes. It should not be construed as advice in any shape or form.

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