Bitcoin Dominance? How to Check and Use While Trading.
In any market, the dominance of a particular asset depends mostly on its market capitalization. In the case of crypto coins, the market cap is calculated by multiplying the current price by the total number of coins in circulation at a specific point in time.
Bitcoin is the world’s largest cryptocurrency by market capitalization (market cap) and commands a large portion of the trading volume (and the attention) in the cryptocurrency markets. If we look at the summative market capitalization of all existing cryptocurrencies, then we can arrive at a total market cap valuation for the entire cryptocurrency space. Therefore, Bitcoin’s dominance over other cryptocurrencies is described as their ratio to one another.
What is Bitcoin Dominance?
Bitcoin dominance is a statistic that compares the market capitalization of one cryptocurrency to all other cryptocurrencies. It allows you to determine whether an altcoin is in the upward or downward trend towards Bitcoin. When BTC dominance rises, altcoin tends to lose its value against BTC and vice versa. In most cases, a steep and consistent Bitcoin Dominance downtrend occurs during a bullish market. An intense bull market tends to push altcoin market capitalization higher than Bitcoin market cap.
How to Calculate Bitcoin (BTC) Dominance
To understand how Bitcoin’s dominance can be high in the crypto market, we must first learn about the structure of the market
To calculate the number, you divide the market capitalization of Bitcoin (BTC) by the combined market capitalization of all other cryptocurrencies.
Bitcoin dominance = Bitcoin (BTC) market capitalization ÷ All other cryptocurrencies market capitalization.
Let’s take an example for a better understanding.
Suppose that the current price of one Bitcoin is $25,000 and that of one Ethereum is $1,200. The total market supply for both cryptocurrencies is 10 million and 100 million, respectively. Hence their respective market caps are $(25,000 X 10 million) = $250 billion for Bitcoin and $(1,200 X 100 million) = $120 billion for Ethereum.
Due to market volatility, Bitcoin and Ethereum prices fall to $24,000 and $500 respectively. Their respective market caps are $(24,000 X 10 million) = $240 billion and $(500 X 100 million) = 50 billion.
As both cryptocurrency prices fell at the same rate, Bitcoin’s market cap still dominate
However, keep in mind that the total supply of Bitcoin is fixed at 21 billion. Once all blocks are mined, their market cap will be determined by the price of each Bitcoin.
Differences Between Bitcoin Dominance and Ethereum Dominance
Like Bitcoin dominance, Ethereum dominance measures the ratio between Ethereum market capitalization and other cryptocurrencies’ market capitalization.
According to Yahoo Finance, in January 2022, Ethereum capitalization was getting closer to Bitcoin as both coins began to be involved in a race for supremacy. In the crypto world, this term is used when two or more cryptocurrencies are getting closer to one another regarding market cap. Throughout 2021, compared to Bitcoin, Ethereum market cap had increased significantly. Many people believe that this significant growth indicated investors’ attempt to find potential return outside Bitcoin.
Nevertheless, according to recent CoinMarketCap data on March 2022 at time of writing, Bitcoin dominance remains at 42% while Ethereum dominance rises only 17.2%.
Bitcoin Dominance vs Altcoin Dominance
By learning about Bitcoin Dominance, you can also learn about trends in the cryptocurrency market. If Bitcoin Dominance is rising, the price of altcoins will decrease. On the other hand, if Bitcoin Dominance is declining, prices for altcoins will go up.
Other factors affecting Bitcoin dominance
Other factors affecting Bitcoin’s market cap include:
Hard forks and pre-mined coins
The pre-mined coins and hard forks on the Bitcoin network unnaturally increase supply and cause the market cap to rise. Another reason you should never consider a crypto’s market cap as its real value.
Bitcoin dominance also depends on fluctuations in altcoin value. Most altcoins have fixed supply, so if their value increases, Bitcoin’s share of overall cryptocurrency market value falls.
How to mitigate the risks of Bitcoin dominance
It would be helpful if you took the time to understand Bitcoin’s dominance as well as other crypto assets, in order to build a strategy that enables you to take advantage of these trends. You can analyse market trends and make profitable decisions accordingly. Calculating the dominance ratio will help frame your investment strategy. After that, you should check Bitcoin’s price trends for a particular timeframe. You can then do the following:
If the price of Bitcoin rises and its dominance ratio is high, you can buy Bitcoins. Similarly, if the dominance ratio is high but the price is falling, you can sell altcoins.If both the ratio and price are down it is time to sell Bitcoins.