Bitcoin dominance is more than just a measure of BTC’s hegemony in the crypto market. It can also be used to derive insights into impending trend reversals.
Anyone looking around the crypto space will stumble across the term Bitcoin dominance again and again. Bitcoin dominance describes the share of Bitcoin in the total market capitalization of the crypto market.
What does that mean?
The market capitalization of a crypto currency provides a benchmark for how much money is invested in the respective crypto network. It is calculated by multiplying the number of tokens in circulation by the price of the respective cryptocurrency. For example: at the time of writing, 19,719,712 BTC is already in circulation. The Bitcoin rate is $ 40,140. This results in a market capitalization of around USD 791 billion for Bitcoin. The remaining crypto networks (the so-called altcoins) come together to 949 billion US dollars. The total market capitalization (Bitcoin + Altcoins) is USD 1.74 trillion at the time of going to press. Because Bitcoin makes up the lion’s share of the total market capitalization, it is called Bitcoin dominance. In the example, this is around 44 percent.
Bitcoin dominance: Only partially meaningful on its own
For obvious reasons, the Bitcoin dominance is of particular interest to traders who trade BTC for Altcoins. But the changes in the balance of power between Bitcoin and Altcoins can also provide indications of the flow of capital into or out of the crypto market as a whole. BTC-ECHO analyst Stefan Lübeck therefore always pays great attention to the Bitcoin dominance in BTC price analysis every Wednesday. However, not in isolation, because:
You always have to see BTC dominance in relation to the movement or trend direction of BTC. If BTC runs sideways and breathlessly in a higher-level bull market, investors there see no chance of return, ergo they jump into the rest of the market with Alt / BTC pairs. Therefore, these phases of Alt / BTC movements are very bullish. As long as BTC ranks sideways and the market does not wobble, Bitcoin dominance decreases disproportionately. However, the money does not go out of the market – which can be seen in an increasing or sideways trend in total market capitalization.
Despite the bottom line positive development in the Bitcoin price, the dominance has been on a decline since the beginning of 2021 – a sign of the strong growth in Altcoins. Lübeck continues:
The moment BTC begins to give way more clearly and heralds a correction, the Bitcoin dominance drops again briefly, and the Alt / BTC pairs explode (relatively), as more Satoshis are available – even if these are due to the falling Bitcoin exchange rate in dollars will rise less sharply or stay the same, depending on how much BTC is sliding.
Low BTC dominance announcing a correction
Due to the typically strong correlation between the Bitcoin price and the Altcoin market, long-term trends in Bitcoin are indirectly relevant for Altcoins as well. Metrics such as the exponential moving average (EMA) are often used to assess long-term trends. For example, the EMA 200 describes the average Bitcoin rate over the past 200 days. In contrast to the Simple Moving Average (SMA), the EMA gives more recent data a stronger weighting. The interaction of Bitcoin’s EMA 200, Bitcoin dominance and total market capitalization can provide information about trend reversals in the crypto market. Because:
As soon as BTC breaks through the important 200 EMA, as seen on May 19, investors anticipate a possible overall market correction. That said, traders go back in US dollars and BTC investors prefer to go back to BTC – which they know tends to be less corrective – and secure their profits. As a result, the BTC dominance increases and the total market capitalization falls at the same time, because in some cases there is also a switch back to Fiat. That means a hard drop for the altcoins. When the altcoin prices collapsed on May 21st, the dollar traders and the BTC holders used these “buying prices” for the altcoins for cheap new entries, the altcoin prices are picking up and the bitcoin dominance is falling again,
Stefan Lübeck explains the interactions of Bitcoin dominance. In the meantime, you can find out how things are going after the latest correction to the BTC rate from the current Bitcoin analysis.