With the expansion of cryptocurrencies to invest in, traders are continuously looking for new techniques to uncover crypto trends. The Bitcoin dominance ratio is a metric that traders have lately adopted to assist them in identifying variances in existing market circumstances between Bitcoin and all other coins.
When used appropriately, Bitcoin (or BTC) dominance can assist you in determining if trading altcoins is a more profitable trend than trading Bitcoin. The names “Bitcoin dominance,” “Bitcoin dominance ratio,” and “Bitcoin dominance index” are commonly used interchangeably, just like “Bitcoin” and “BTC.”
In this article, we’ll define Bitcoin dominance and show you how to trade with it. Let’s get started!
Bitcoin dominance: An overview
Bitcoin dominance is a metric of how much of the whole crypto market cap is made up of Bitcoin. It might assist you in understanding the trend of BTC and altcoins.
The essential aspect of Bitcoin Dominance is that it can tell you whether altcoins are in a decline or an upswing to BTC.
- When BTC Dominance rises, alts lose value in comparison to BTC.
- When BTC Dominance drops, alts gain value in comparison to BTC.
This means that you should be in Bitcoin (or cash) while Bitcoin Dominance is growing and in alts (including Ethereum, large, mid, and low caps) while Bitcoin Dominance is dropping.
A sharp and constant decline in dominance occurs during crypto bull markets because influential bull markets tend to boost alt capitalizations higher than Bitcoin. Similarly, a reversal of this pattern usually indicates a bear market.
It’s almost that simple. Bitcoin dominance might have varied consequences depending on the time range.
Calculating Bitcoin dominance
Based on the BTC dominance definition, calculating the number is simple. But, first, divide the market capitalization of Bitcoin by the market capitalization of all other cryptocurrencies.
To determine BTC Dominance, you can use the formula below:
Bitcoin dominance = Bitcoin (BTC) market capitalization/ All other cryptocurrency’s market capitalization.
Let’s take an example:
Suppose the overall market value of all other cryptocurrencies, except BTC, is 100 million USD today, and the market capitalization of Bitcoin is 75 billion USD. In that case, BTC’s Dominance is 75%, according to the calculation.
Bitcoin Dominance = 75/ 100 i.e. 75%
Bitcoin dominance Vs. Ethereum dominance
Ethereum Dominance, like Bitcoin Dominance, is a statistic that quantifies the ratio of Ethereum market capitalization to the market capitalization of other cryptocurrencies.
According to Yahoo Finance, in January 2022, the capitalization of Ethereum was nearing the Bitcoin as both currencies began to be involved in flippening. This word is used in the cryptocurrency field when two or more cryptocurrencies’ market capitalizations are approaching one another.
In comparison to Bitcoin, Ethereum’s market worth climbed tremendously throughout 2021. Many individuals feel that this massive increase reflects investors’ efforts to locate possible returns outside Bitcoin.
Nonetheless, according to CoinMarketCap’s most current Dominance statistics as of March 2022, Bitcoin Dominance remains at 42% at writing. At this percentage, Bitcoin outnumbers Ethereum, which only has 17.2%.
Trading with Bitcoin dominance
When aiming to trade Bitcoin dominance, there are several aspects to consider. First, recognize that Bitcoin’s supremacy might decrease if interest in any one altcoin is significant. This interest in a particular cryptocurrency does not imply that other altcoins will have positive developments. It may take some time for the market to adjust itself.
It’s also worth considering the intentions of specific notable cryptocurrencies and whether or not those intentions will have a long-term influence on the altcoin market. For example, a stablecoin may see a considerable increase in volume for the time being.
Users may, however, invest in such stablecoin to transfer cash to Bitcoin since stablecoins can be a simple method to onramp funds into the crypto market.
Because of this action, Bitcoin’s dominance may decline and regain swiftly, negatively harming short-term trading. Fear of missing out (FOMO) is another element that might lead to unanticipated short-term reductions or spikes in Bitcoin supremacy.
New currencies are constantly entering the crypto market. Some of the new altcoins that join the market generate a lot of attention, resulting in hundreds of millions of dollars moving into the altcoin side, reducing Bitcoin’s dominance significantly.
However, many new cryptocurrency initiatives quickly lose their buzz or even become a hoax, prompting people to withdraw their holdings as soon as they put them in. In that event, Bitcoin’s dominance may reclaim its former position.
Consider the extremes of Bitcoin’s dominance ratio as well. Before altcoins joined the market, Bitcoin had market domination of more than 90%. However, enthusiasts point out that Bitcoin’s supremacy is unlikely to return owing to the prominence of altcoins in today’s market.
As altcoin initiatives acquire acceptance in the mainstream, Bitcoin’s dominance is more likely to fall than rise.
As a result, traders should note when Bitcoin dominance is approaching an all-time high, as this might indicate a suitable threshold beyond which BTC dominance may encounter resistance. On the other hand, users should keep a watch on BTC dominance as it approaches new lows and how the altcoin market reacts as a result.
The Bitcoin dominance ratio is a valuable tool for understanding trends in the cryptocurrency industry. For example, a trader can decide if the stronger trend is with altcoins or Bitcoin based on the patterns within the ratio and the price of Bitcoin.
Bitcoin’s supremacy is not without drawbacks. However, for the time being, it can assist traders in better understanding crypto market circumstances.
Disclaimer: Cryptocurrency is not a legal tender and is currently unregulated. Kindly ensure that you undertake sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information provided in this section doesn’t represent any investment advice or WazirX’s official position. WazirX reserves the right in its sole discretion to amend or change this blog post at any time and for any reasons without prior notice.