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Riding The Trend With BTCDOM Index

2021-07-14

Key Takeaways:

  • The BTCDOM index is a tradeable index offered by Binance Futures that enables traders to get a sense of Bitcoin’s value relative to that of the broader cryptocurrency market.

  • When the market share for altcoins increases, Bitcoin’s dominance loses value, as does the BTCDOM index, the opposite is true because when Bitcoin’s market share increases, the BTCDOM increases. 

  • The index gives traders the ability to trade on more extended trend movements to have a potentially safer alternative for speculating on Bitcoin.

Bitcoin ranks first amongst the most adopted cryptocurrencies, with an estimated 100 million users. It is the most decentralized, secure, scarce, and reliable crypto asset available to everyone who has access to the internet. 

But even if you’re a Bitcoin maximalist, you’re aware that Bitcoin isn’t the only crypto in the market, and alternatives like Ethereum, BNB, and Litecoin, to name a few, have accumulated a loyal audience.

Therefore, estimating Bitcoin’s market value in relation to the rest of the cryptocurrency market is incredibly useful to gain a broader perspective. Using a tool such as the Bitcoin Dominance Index (BTCDOM) can help traders weigh their options on exchanges like Binance Futures

What Is the BTCDOM Index?

The BTCDOM index is offered by Binance Futures and enables traders to speculate the relative performance of Bitcoin against altcoins. Similar to the Bitcoin dominance indicator, BTCDOM uses a pricing index to reflect the relative value of the flagship cryptocurrency. 

Unlike the real Bitcoin market dominance indicator, which is capped within 0~100%, the BTCDOM index is uncapped and more suitable for derivatives trading.

How to Take Advantage of BTCDOM Index?

The BTCDOM index is helpful under several circumstances and can be used to confirm how essential or relevant Bitcoin is at any given time. 

For example, macroeconomic uncertainties and failures have been strongly correlated to Bitcoin’s market share increases. Likewise, increased adoption of Bitcoin as a means of payment or a store of value can significantly impact Bitcoin’s demand relative to altcoins. 

These events can be tracked and even observed in real-time using the BTCDOM index because it demonstrates the relative demand for Bitcoin or altcoins, which is more simple than watching the price of BTC. 

The BTCDOM index is undoubtedly useful when searching for signals that indicate the prevailing market cycle. 

For instance, when the market share for altcoins increases, BTC’s dominance loses value, as does the BTCDOM index. The opposite is true because when BTC’s market share increases, the BTCDOM increases as well. 

As such, the index can be used by traders to learn about crypto market cycles and understand the relationship between Bitcoin and altcoins.

Can You Use the BTCDOM Index to Predict Market Cycles?

The BTCDOM index is helpful to an extent but should not necessarily be used to predict market cycles entirely. Instead, traders can consider using similarities between past market cycles coupled with the insight found on the BTCDOM index to speculate on upcoming market trends. 

For example, at the start of previous Bitcoin bull markets, there were also uptrends in the number of altcoins and support for altcoins.

The number of altcoins in the market is constantly changing, with new ones surfacing and others self-terminating. New altcoins appear during bull runs, and similarly, those new coins die off when the market turns bearish. This makes the market volume outside of Bitcoin less reliable and harder to adjust for. 

In addition to the new altcoin, the amount of Bitcoin that is ‘hodled’ (held for more than one market cycle, potentially permanently) is almost always increasing. In a similar fashion, there are many BTC tokens that have been forgotten or have become inaccessible due to a loss of key phrases. These inactive coins also inhibit the accuracy to estimate BTC’s domination. 

Therefore, the BTCDOM index doesn’t provide highly reliable indications of upcoming trends but instead can serve as a gauge of market activity. 

When large amounts of Bitcoin are being bought and altcoin support grows in parallel, traders could speculate on bullish movements. Conversely, when altcoin projects die off along with their support, and when BTC support is also diminishing, traders may decide bearish movements are ahead. 

Still, the cryptocurrency market is known for extreme volatility. Unexpected influences to the market can happen at any point, FUD can scare new investors, and euphoria can inflate cycles beyond the average speculation. 

No tool is perfect for predicting cycles, but the BTCDOM index is a good snapshot of the current market sentiments.

Why Trade BTCDOM Index?

Trading the BTCDOM index can be beneficial to traders who don’t wish to trade highly volatile cryptocurrencies, but rather on the market dominance of Bitcoin. The index is much less volatile and more predictable than BTC itself. 

In addition, trading the index affords traders the ability to trade on longer trend movements. This way, traders have a potentially safer alternative for speculating their funds than directly on BTC.

The BTCDOM Index provides a broad market benchmark to support:

  • Asset Allocation - You can now balance risk and reward by apportioning your portfolio's assets to capture market cycles.

  • Performance Measurement - The benchmark will be available for more targeted investment mandates. For instance, a performance comparison between Bitcoin vs. altcoins.

  • Hedging - You can efficiently manage risk by hedging with the BTCDOM index Perpetual Contract. For example, long-term investors in Bitcoin can use the index as a short hedge to reduce price volatility. 

  • Short-Term and Nomentum Trading - In trending markets, there are times when Bitcoin outpaces altcoins as investors’ sentiment shifts, presenting trading opportunities for short-term traders. You can now capture short-term trends, enabling you to be flexible and reactive to changing market conditions. 

Conclusion

The BTCDOM index can be used as a snapshot of the current market sentiment between Bitcoin and altcoins. It helps understand market cycles and determine the stage of a market cycle. 

Although useful, the index is prone to drawbacks such as fluctuating altcoin volume in the market and compensating for the amount of dormant BTC. The BTCDOM index doesn’t provide the perfect insight into upcoming market trends. Therefore, it shouldn’t be used alone to make investment decisions but instead paired with other tools.

Lastly, the BTCDOM index is much easier to predict over longer periods. It is less volatile because it represents a combination of crypto assets rather than one or several separate ones.

Read the following helpful articles for more information about Binance Futures:

Disclaimer: Crypto assets are volatile products with a high risk of losing money quickly. Prices can fluctuate significantly on any given day. Due to these price fluctuations, your holdings may significantly increase or decrease in value at any given moment, which can result in a loss of all the capital you have invested in a transaction.

Therefore, you should not trade or invest money you cannot afford to lose. It is crucial that you fully understand the risks involved before deciding to trade with us in light of your financial resources, level of experience, and risk appetite. If required, you should seek advice from an independent financial advisor. The actual returns and losses experienced by you will vary depending on many factors, including, but not limited to, market behavior, market movement, and your trade size. Past performance is not a guide to future performance. The value of your investments may go up or down. Learn more here