What is it?
The cryptocurrency markets have a substantial amount of money poured into them. The metric used to calculate this amount is called the market cap. The industry currently amounts to roughly $930 billion, which has less than a year ago been as high as $2 trillion. These figures represent the aggregate value of all cryptocurrencies.
Therefore, it is essential for an investor, especially a retail investor, to learn how to navigate the industry. Bitcoin(BTC) is the largest cryptocurrency by market cap and commands the most significant portion of the volume in the crypto markets. The ratio of the market cap held by BTC concerning the rest of the cryptocurrencies is referred to as ‘Bitcoin dominance.’ This is also crucial because most cryptocurrencies trade against BTC.
Some feel that to have a more accurate representation of Bitcoin dominance. Stablecoins should be excluded because there isn’t a project backing them, and they are backed by collateral. Others feel that since they are part of the industry, they should be accounted for too.
Why is it important?
If an investor wants exposure to this asset class, one needs to decide where that investment will go. Per figures on coinmarketcap.com, there are currently more than 21,000 cryptocurrencies, and every other cryptocurrency that is not BTC is referred to as an altcoin. This umbrella term is sometimes also broadly used to reference ERC-20 tokens. When choosing between BTC or altcoins, Bitcoin dominance is considered by many to be a helpful metric, assuming that Bitcoin leads the markets.
How does Bitcoin dominance change?
Bitcoin dominance can indicate how well the altcoin market is doing vis-a-vis BTC, which is generally considered the leading project in the industry. In the past, BTC dominance was much more extensive and closer to 100% until around 2017, investment in altcoins started to grow. If the altcoin industry is growing faster than BTC, Bitcoin dominance falls. If, on the other hand, the altcoin industry is growing slower than BTC, then Bitcoin dominance goes up.
Therefore, it gives a quick measure of the health of the altcoin market and is combined with other tools. It aids investors in understanding whether it is a good time to invest in BTC or altcoins. It is also interesting to note that since BTC is the oldest cryptocurrency, it tends to absorb market information quicker, and shifts in its price are generally considered essential for intelligent and profitable trades.
Apart from Bitcoin dominance, investors need also to monitor BTC’sBTC’sce. One cannot assume that when Bitcoin dominance is going up, the price is, by default going up. This ratio is also sensitive to potential hype-driven altcoin pumps, which momentarily alter the numbers. Therefore, the focus should be on the general trend instead of daily percentage shifts.
In an article published by Cointelegraph, Max Moeller lays out four scenarios that can play out and what an investor’s plan should be depending on the interplay between Bitcoin dominance and its price. This is explained below:
- BTC value going up and BTC dominance going up: This potentially signals a BTC bull market, so BTC should be bought.
- BTC value going down and BTC dominance is going up: This potentially signals an altcoin bear market, so altcoins should be sold.
- BTC value going up and BTC dominance is going down: This potentially signals an altcoin bull market, so altcoins should be bought.
- BTC value is going down, and BTC dominance is going down: This potentially signals an altcoin and BTC bear market, so it sits to hold cash.
While this metric is exciting and valuable, it is generally considered to work because BTC is regarded as the most popular cryptocurrency in the world. If that changes in the future, then Bitcoin dominance will likely matter much less.
It is also important to stress that despite the value of Bitcoin dominance, it alone does not and should not lead to investing and trading decisions. The best form of decisions is when investors are well informed and educated and use multiple available tools.