TL;DR

Bitcoin dominance, or BTC dominance, is calculated as the ratio of bitcoin's market capitalization to the rest of the cryptocurrency market. Some cryptocurrency investors and traders use bitcoin dominance as a guide to adjust their trading strategies and portfolio structures.


Introduce

Although there are currently thousands of altcoins, bitcoin - the first cryptocurrency - is still the largest digital asset by market capitalization. Observing the change in bitcoin's share of the total value of the cryptocurrency market, traders have detected certain recurring patterns of market conditions. Some investors have used BTC dominance as a guide for their trading behavior. In particular, BTC dominance is expected to provide insight into current general market trends.


BTC dominance and market capitalization

In simple terms, market capitalization refers to the total value of a certain asset in circulation. For bitcoin, market capitalization is calculated by multiplying the current price and the number of BTC that have been mined to date.

You can calculate bitcoin dominance with the following formula:

Bitcoin Dominance = Bitcoin Market Cap/Total Cryptocurrency Market Cap


Factors affecting BTC dominance

Before the altcoin boom, it was not uncommon for bitcoin dominance to hover above 90%. As altcoins gain more user and investor interest, bitcoin has lost some of its attention to other assets with greater price volatility and projects with use cases interesting.

While bitcoin was created to change the way value transfer works, other cryptocurrency projects have evolved to make their coins do more. Unlike bitcoin, in addition to remittances, many altcoins are present in different fields, including gaming, art, and decentralized financial services. Depending on current trends, there may be a lot of interest and trading demand around a particular project's cryptocurrency. For example, the NFT boom may have caused BTC dominance to decline somewhat in favor of NFT-related tokens.

Over time, bitcoin has established itself as one of the more “stable” cryptoassets. Meanwhile, traders may be interested in projects with strong price movements and opportunities to profit from some of the newer altcoins. This could also impact bitcoin dominance, leading to capital flowing into riskier assets. In this case, the sectors these altcoins represent may not be as important as the potential profits.

Bull and bear markets

Over the past few years, there has been a general increase in stablecoin popularity, a trend that has put constant pressure on BTC dominance. Specifically, during bear markets or during times of volatility, stablecoins are often used to protect investors' capital amid falling prices. Stablecoins are cryptocurrencies that are pegged to an asset with a stable price, such as fiat currency or precious metals. Cryptocurrency investors and traders often use stablecoins to lock in profits without having to convert their crypto to fiat. As funds move out of the BTC market and into stablecoins, BTC dominance could decline.

The opposite can happen in a bull market. As markets continue to rally, traders may be incentivized to shift value from stablecoins to assets that are more volatile but offer more trading opportunities, like bitcoin. However, traders can also choose riskier options and inject liquidity into altcoins that are even more volatile than BTC, so the overall impact of favorable market conditions on Bitcoin dominance depends on specific circumstances.

The rise of stablecoins

Stablecoins provide a convenient way to access a variety of cryptocurrencies, compared to using fiat currencies. This is because fiat to crypto exchanges may be limited and only offer popular cryptocurrencies and stablecoins. However, crypto-to-crypto exchanges typically offer a wider selection of tradable cryptocurrencies, along with variety with stablecoins. Therefore, those who want to trade specific cryptocurrencies can enter the market through stablecoins. Naturally, if a significant amount of new capital enters the market via stablecoins rather than bitcoin, the total value of the cryptocurrency market will increase, causing a decline in BTC dominance.

The emergence of new cryptocurrencies

Sometimes, new cryptocurrencies entering the market can quickly gain popularity, causing BTC dominance to decline. Remember that bitcoin is “fighting” every other cryptocurrency on the market, so the emergence of many popular altcoins at the same time could affect it. However, there is a possibility that these altcoins may lose popularity once the hype dies down. If that happens and funds are moved from these altcoins to BTC or exit the cryptocurrency market altogether, BTC dominance could increase again.


Use BTC dominance in trading

Wyckoff method

Developed in the early 1930s, the Wyckoff Method is a set of principles designed for traders and investors in the traditional financial markets. Some of these principles, such as the law of cause and effect, can be applied when looking for profit opportunities using BTC dominance.

Many traders and investors use the Wyckoff Method to identify market trends, estimate the likelihood of trend reversals, and trade over time. According to Wyckoff, trading behavior is organized into four stages: Accumulation, marking, distribution, and discounting. For some traders, determining the location and timing of money flows based on market timing to make informed trading decisions is quite important.

Diversified traders and investors often use this approach to recognize stronger trends. Below are some situations where the Wyckoff Method is used to analyze.

Using BTC dominance to determine altcoin season

With the growing number of altcoins on the market, it's no surprise that bitcoin's dominance is being diluted. In recent years, several altcoins have grown in popularity, causing the total market capitalization of all altcoins to briefly surpass bitcoin. The period in which altcoins consistently outperform bitcoin is known as “altcoin season” or “altcoin season.” According to the principles of the Wyckoff Method, the movement of funds from bitcoin to altcoins occurs cyclically.

Because altcoins tend to perform better during altcoin season, it is possible to see bitcoin dominance wane during this period in the market cycle. Therefore, those trading both bitcoin and altcoins can monitor bitcoin dominance to adjust their portfolio accordingly.

Use BTC dominance with current bitcoin price

Some people track bitcoin price along with bitcoin dominance to help them make trading decisions. While they are by no means certain, the relationship between BTC price and its dominance can be informative.

As BTC price and dominance increase, this could signal a potential bull market in bitcoin.

When BTC price is rising but BTC dominance is falling, it could signal a potential bull market in altcoins.

When BTC price is falling but BTC dominance is increasing, it could signal a potential altcoin bear market.

As BTC price and dominance decline, it could signal a potential bear trend for the entire cryptocurrency market.

While these two factors do not directly indicate a bull or bear market, historical data shows that they are correlated.


summary

BTC dominance is a tool that helps shed light on how market cycles are changing. Some traders use it to fine-tune their trading strategies, while others use it for portfolio management. Note, BTC dominance does not guarantee the performance of bitcoin or any other cryptocurrency but it does act as a guide to help traders plan and determine their trading approach .