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Bitcoin dominance, or BTC, is measured by the ratio of Bitcoin's market capitalization to the capitalization of all other assets in the cryptocurrency market. Some investors and crypto traders are tracking Bitcoin's dominance to adjust their trading strategies and portfolios.


Introduction

Although there are thousands of altcoins available on the market, Bitcoin, the very first cryptocurrency, remains the largest digital asset by market capitalization. While studying the dynamics of Bitcoin's share in the cryptocurrency market, some traders noticed certain market patterns and began to use BTC's dominance to develop trading strategies. It is believed that the current market trend can be judged by the level of BTC dominance.


BTC Dominance and Market Capitalization

In simple terms, market capitalization reflects the total outstanding value of a particular asset. Bitcoin's market capitalization is calculated by multiplying its current price by the number of BTC mined to date.

Bitcoin dominance is calculated using the following formula:

Bitcoin Dominance = Bitcoin Market Cap / Total Market Cap


Factors influencing BTC dominance

Before the explosion in popularity of altcoins, Bitcoin could account for more than 90% of the market. As altcoins gained popularity among users and investors, Bitcoin gradually lost its undivided attention in favor of more volatile assets and projects with additional features and use cases.

If Bitcoin was conceived only as a new way to transfer funds, then other crypto projects strived for more. Many altcoins are used not only for the transfer of assets, but also in the gaming industry, the artistic field and decentralized finance. Trading and interest around a certain type of crypto project depends on the current trend. For example, the surge in popularity of NFTs could lead to a decline in BTC's dominance in favor of NFT-related tokens.

Over time, Bitcoin has established itself as one of the most “stable” crypto assets. However, wildly fluctuating prices of new altcoins are not always a bad thing, as many traders use their volatility for potential profit. In this case, there is an outflow of funds into riskier assets and it is not the areas of use of altcoins that matter, but their potential profit.

Bull or bear market

Over the past few years, the popularity of stablecoins has risen sharply, while BTC's dominance has declined. Particularly during bear markets or times of volatility, crypto investors use stablecoins to protect their funds during periods of falling prices. A stablecoin is an altcoin that is pegged to a stable price asset, such as fiat currency or a precious metal. Crypto investors and traders use stablecoins to lock in profits without having to convert crypto into fiat. When funds move from the BTC market to stablecoins, BTC's dominance decreases.

In a bull market, the opposite situation occurs: during periods of rising markets, traders may be tempted to move funds out of stablecoins and into more volatile assets that offer more trading opportunities. Bitcoin could be such an asset. However, traders can also take riskier options and transfer liquidity into even more volatile altcoins, so the overall impact of favorable market conditions on Bitcoin's dominance is highly contextual.

Withdrawing funds via stablecoins

Stablecoins provide access to a wider range of cryptocurrencies compared to fiat. While fiat-to-cryptocurrency exchanges exist, they may be limited and only offer the most common cryptocurrencies and stablecoins. At the same time, cryptocurrency-to-cryptocurrency exchanges typically provide a wider selection of assets traded against specific stablecoins. Thus, traders who want to trade specific cryptocurrencies can enter the market through stablecoins. Naturally, if significant amounts of new funds enter the market through stablecoins rather than Bitcoin, the overall value of the cryptocurrency market increases and BTC's dominance decreases.

The emergence of new coins

Sometimes BTC's dominance may decline due to the release of new coins. Bitcoin is battling for dominance with every other cryptocurrency on the market, so the emergence of several popular altcoins at once could have a significant impact on it. However, after the hype subsides, these altcoins may lose their popularity. In this case, funds will be transferred back to BTC or withdrawn from the cryptocurrency market altogether - as a result, BTC dominance will increase again.


Applying BTC Dominance to Trading

Wyckoff method

Developed in the early 1930s, the Wyckoff Method is a set of principles intended for traders and investors in traditional financial markets. Some of these principles, such as the Law of Cause and Impact, can be used to find profitable strategies based on BTC dominance.

Many traders and investors use the Wyckoff method to determine the market trend, the likelihood of a trend reversal, and the timing of trades. According to this method, trading behavior consists of four phases: accumulation (accumulation), impulse or uptrend, distribution and markdown (correction, downtrend). For traders making trading decisions based on time, it is extremely important to know where and when funds are moving.

Diversified traders and investors often use this approach to pick the strongest trend. Below are several scenarios for using the Wyckoff method.

Altcoin Season Defined by BTC Dominance

As the number of altcoins on the market increases, Bitcoin's dominance is weakening. In recent years, some altcoins have gained great popularity, causing the market capitalization of all altcoins to briefly exceed that of Bitcoin. The period when altcoins consistently outperform Bitcoin is called altcoin season. According to the Wyckoff method, the movement of funds from Bitcoin to altcoins is cyclical.

Since altcoins tend to outperform during altcoin season, Bitcoin's dominance declines during this phase of the cycle. Therefore, users trading both Bitcoin and altcoins are keeping an eye on Bitcoin's dominance to adjust their portfolios accordingly.

Tracking BTC Price and Dominance

Some traders track the price and dominance of Bitcoin to make the most informed decisions. Here are some potential outcomes that BTC's price movement and dominance could indicate - although, of course, these indicators may not be accurate.

The rise in price and dominance of BTC could indicate a potential bullish trend in the Bitcoin market.

The rising price and falling dominance of BTC could indicate a potential bullish trend in the altcoin market.

The falling price and increasing dominance of BTC could indicate a potential bearish trend in the altcoin market.

The fall in BTC price and dominance could indicate a potential bearish trend in the entire cryptocurrency market.

These two factors do not necessarily mean a bull or bear market, but past experience does indicate some correlation.


Summary

BTC dominance helps track changing market cycles. Some traders use it to adjust their trading strategies, while others use it to manage diversified portfolios. Please note that BTC dominance does not guarantee the performance of Bitcoin or any other cryptocurrency, but acts as a guide to planning your trading approach.