Understanding Bitcoin Dominance: How it Affects the Crypto Market?



The sheer size of the crypto industry is quite impressive, but many enthusiasts often forget that the biggest fish in the tank is the Bitcoin. Some experts believe that it is simply too big to fall which is the reason why the whole industry will likely survive all the storms that it has braved and braving through right now.

While the evaluation of the whole industry is slightly higher than the overall market cap, both metrics are dominated by BTC which is the biggest coin dwarfing even its close second — Ethereum. The prevalence of Bitcoin in the market is what determines its influence on the general situation in the crypto industry.

Introduction: What Is Bitcoin Dominance and How Does it Influence the Crypto Market?

First of all, we need to answer a very important question: “What is Bitcoin Dominance Index?” Market Cap BTC Dominance is a metric that determines the current position of the biggest coin compared to the rest of the industry. It shows the share of BTC’s market cap in relation to the price of 125 other top tokens which is a great indication for the general direction of the industry and the current situation in the market.

Since Bitcoin plays a huge role in many aspects of price evaluations within the crypto world, it is only natural that thousands of experienced retail traders keep a tab with Bitcoin Dominance chart open at all times. While it is not absolutely necessary, it can be very informative!

Retail traders have to analyze price actions across multiple digital assets while tracking the current level of Bitcoin dominance meaning that there should be a connection. Let’s talk about some apparent uses of this particular metric:

  • It helps retail traders identify good moments to start protecting their long positions on digital assets that start losing their share of the total market cap to Bitcoin.
  • When it comes to using advanced strategies like statistical arbitrage, experienced analysts can use BTC dominance to assess the strength of correlations between certain digital assets.
  • Bitcoin Dominance is a good indicator of the general state of affairs in the industry as a whole and can help find good moments to buy low.

The idea behind the metric is to give all retail traders a comprehensive picture of the whole crypto domain and quickly identify digital assets that will likely start growing in value compared to the rest of the market. It is also a useful habit to check the dominance of other coins which can also be a great way to look at the current situation from a different angle.

First, you need to learn how to calculate crypto market cap dominance. It is the share of a coin’s market cap in the total market cap determined by dividing the former by the latter and multiplying it by 100 to get the value denoted in percentile points.

Here’s a quick example with imaginary numbers:

  • Assume that the current market cap of BTC is $500 billion.
  • Assume that the total market cap of 125 top tokens is $1 trillion.
  • Divide 500,000,000,000 by 1,000,000,000,000 to get 0.5.
  • Multiply this number by 100 to get 50%.
  • In this example, the current market cap BTC dominance is 50%.

A BTC dominance chart is a reflection of the dynamic of this metric over time. Just like price action, this metric can have volatility, trend, retracements, and other parameters that we usually associate only with prices.

Exploring Bitcoin’s Historical Dominance in the Crypto Market

Experts often look at the current situation with any given digital assets through the prism of historical data. This approach can help identify trends and find patterns that bound to repeat themselves due to the nature of the psychological back-and-forth between the bulls and the bears. However, the crypto market cap history can give you additional insights.

For starters, the change in the market cap over time is a good indication of the general mood in the community of large investors in relation to cryptocurrency, its potential rate of adoption, and future returns on investments. When the total market cap contracts, it means that less people are willing to hold on to tokens and drive up prices. When it starts expanding, more people are joining and speculators can sell their holdings at higher prices.

The historical Bitcoin dominance chart is a source of valuable information about the direction of the market and the mood of its participants. We already discussed how you can use this data to assess the value of other tokens that are compared directly to Bitcoin. However, you can also use the history of altcoin price performance if you are interested in investing in it in the nearest future.

Altcoin dominance chart is a good way to look at other tokens to further deepen your knowledge about its place in the industry and the potential to perform in the long run.

Here’s an example using historical data on Ethereum market cap dominance chart acquired from Statista:

  • The market cap dominance of Ethereum was less than 2.5% in August of 2015.
  • The all-time high (25.32%) was reached in June of 2017.
  • By September of 2022, it stabilized at 19.8%.
  • The total gain over the 7-year period is 792%.
  • The average value over the same period is close to 16%.

What these data points tell us is that the market has never doubted the strength of the coin and continues keeping it above 16% despite all the market fluctuations. The trend seems to be positive, yet without any signs of ETH overcoming BTC in the foreseeable future. It looks like a safe investment and a good candidate for a long market position.

When compared with Bitcoin, Ethereum looks like a correlated digital asset that often performs similarly which makes these two assets interesting to investors looking for a good pair trade performed over a long time frame.

It is important to remember that Bitcoin market dominance is not a metric that provides a host of information without any context. You need to have a wider perspective and track how other tokens gained and lost dominance in comparison to the benchmark which is, for many, BTC.

Factors that Impact Bitcoin’s Dominance in the Market

While it may seem that Bitcoin is the undisputed king of the hill, it had rough patches caused by various problems in the industry including hacking scandals, the FTX debacle, and even the banking crisis. There are many factors that may affect the biggest token in the industry. What is important to remember is that these factors are not always related to Altcoin VS Bitcoin performance.

Many external factors affecting cryptocurrency prices can significantly change the situation in the market. Let’s discuss some of them.

  • Huge events within other blockchain networks. The last year’s change in the architecture of Ethereum is a good example. When the second-biggest network switched from PoW to PoS, it should have been devastating news for the Bitcoin community. Many experts believed that it will affect BTC dramatically. In the end, it didn’t, but the sentiment was there and ETH managed to slightly push back against Bitcoin for a couple of weeks in September, 2022.
  • Changes in the monetary system in the US. The Federal Reserve making huge announcements and playing with interest rates also can create a period of volatility in the crypto industry. However, any signs of a weakening US dollar are often translated into bumps in the BTC dominance chart since many enthusiasts and even financiers believe that Bitcoin is a deflationary currency compared to the fiat USD making it an immediate candidate for investors who want to hedge against the US dollar and its position in the global economy.
  • Pump-and-dump schemes or other sudden changes in altcoin market caps. Obviously, the BTC market dominance metric is related to other tokens. It means that a sudden bull rush on any other token in the TOP 125 can cause a change in the BTC’s crypto dominance chart incurring volatility and price fluctuations which look like ripples that may push prices and create uncertainty in the short run.

Other factors that also affect Bitcoin’s dominance today are changes in the global economy, the scale of mining operations, adoption rates, financial policies regarding BTC and crypto, and many others. It is important to remember that Bitcoin is the biggest coin and represents the crypto industry as a whole which means that its position in relation to other classes of financial assets can be very influential within the cryptocurrency industry.

Using Bitcoin Dominance as a Guide When Trading Cryptocurrency

The main use for this metric is to determine the current mood in the community of investors and decide where to invest according to the general trend. The Bitcoin dominance chart is a great source of valuable insights that tell you when people are interested in relocating their capital and take on a higher risk creating a host of opportunities in niche markets or during ICOs.

Initial Coin Offerings are quite unpredictable individually, but can be assessed together. The pushback from other tokens can be quite strong against the BTC dominance meaning that people are willing to sell their long BTC positions to funnel their funds into other investment ventures like ICOs. While it will not give you a good indication of which exact ICO to target, it can be a good signal that you should also start paying attention to them in general.

A good investment opportunity can be just around the corner with people investing in riskier DeFi projects and low-price tokens expecting them to explode in value due to an artificial pump or a change in perception from the investors community.

Understanding crypto trends with market capitalization data

Whenever something big happens in the industry, you can immediately notice a change in the crypto market dominance. Bitcoin is rarely affected to a high degree, but it happens. For example, the January of 2018 was marked by a sudden reduction of the BTC dominance to just 37% with other tokens gaining traction quickly.

It was a moment when people were interested in exploring other options and investing in riskier ICOs. While many of said ICOs crashed and burned eventually, some projects survived and managed to take their own places in the crypto industry.

When used in conjunction with technical analysis strategies, trading with Bitcoin dominance chart can be quite fruitful. However, you must remember some rules:

1.       When the BTC dominance shrinks, it means that the market is willing to expand the dominance of other tokens and you should be on lookout.

2.       When the BTC dominance grows, investors are careful and don’t want to risk their finances in niche ventures and questionable projects.

3.       Any stagnation in dominance means that the volatility should not be expected and taken into consideration in the long run.

You may try assessing future volatility, potential ROI of your current activities, prices of niche assets, and other important metrics based on the change in the behavior of BTC dominance. The utility of this particular tool is quite impressive if you understand the interconnectedness of the industry and mutual codependency of various digital assets deployed on different networks.

Market caps of altcoins contract and expand regularly creating uncertainty and causing doubtful thinking. However, you can always rely on the robustness of mainstream coins during periods of volatility to calmly evaluate your current position and the risk level of your portfolio. Use the information smartly and you will avoid many potential challenges with diversification and individual investments.

What Does Bitcoin Dominance Mean for Retail Traders?

This metric is not something that can dramatically affect your approach to technical analysis or evaluation of specific investments. However, it is a good source of information when you are plotting your route for the long run. Without a solid benchmark, it is hard to identify truly promising investment prospects and diversify your portfolio properly.

Bitcoin should be used as your benchmark and its dominance often helps traders avoid ventures with higher risk profiles. At the same time, if you are using very specific trading strategies like automated systems or DCA buying, it is a good idea to abstain from putting too much importance into assessing the relationship between digital assets in your portfolio and the current dominance of Bitcoin in the industry.

Since its introduction to the TradingView platform, you can use Bitcoin dominance as a source of signals for automated trading systems deployed on automation platforms like WunderTrading or CryptoHopper. However, it is hard to find actually useful applications of this metric to day trading and scalping trading systems commonly utilized by users of automation.

What retail traders must remember

The crypto world is an excellent environment for people utilizing advanced instruments like automated trading. What is BTC dominance for retail traders who use bots? It is a metric that can be used as a trigger for GRID bots deployed on exotic tokens that may take off when the BTC dominance falls below a certain threshold. However, it is a very niche scenario that will not work for the vast majority of traders.

There are several important tools that you should use and remember:

  • Traditional technical indicators. Tools like Relative Strength Index, Stochastic, MACD, Volumes, and others can be extremely useful when trying to analyze the current situation in the market regarding specific financial instruments. Some of them can be paired with BTC dominance. For example, Klinger Oscillator and moving averages are commonly used to analyze the dynamic of a Bitcoin dominance chart.
  • Many digital assets behave completely independently from Bitcoin. A sudden change in the market cap of ADA can be caused by a tunneling of funds into SOL or something else leaving BTC’s dominance unchanged. If you use it as your main trigger for the whole automated trading system, it can be absolutely useless in such scenarios.
  • Contemporary automation tools do not need to react to the overall market situation and usually work off what can be extracted from a single price chart. It means that assessing Bitcoin dominance is only useful for people who do everything manually and can apply the metric to their overall investment plan. It is hard to use BTC dominance efficiently within the limitations of day trading or scalping approaches.
  • You need to see the trends in crypto dominance charts to see where the market as a whole is moving at any given moment. It does not mean that you should be focusing on assessing the relative change in BTC dominance over time above all else. Again, its dynamic can be completely useless to an analyst trying to work with digital assets that are not correlated with Bitcoin.

While it may sound like we are saying that Bitcoin dominance chart is a useless tool for many retail traders, it is far from the truth. The efficiency of this instrument is quite apparent and should be at least addressed during any assessment process applied to crypto assets. However, putting too much value in this tool can be detrimental to your overall strategy.

The influence of stablecoins

Another important thing that many retail traders often forget when looking at the Bitcoin dominance chart is that the position of the biggest and most attractive coin can be bulged by stablecoins like Tether or Binance USD. These two tokens provide an additional level of stability and comfort to many investors who are looking to use cryptocurrencies as a hedge against fiat.

They don’t necessarily want to get rich overnight by investing in the right coin. They recognize the value of diversifying their assets with the addition of some ultra-safe crypto like USDT or BUSD. Bitcoin and Ethereum may not even be on their radars.

However, any influx of investors who are willing to bypass and ignore BTC to focus on stablecoins will create a situation where the market dominance of Bitcoin shrinks causing inexperienced investors to believe that people are interested in buying obscure high-risk coins. This mistake in assessing the situation in the market can be very costly.

Note that an arrival of a new token to the block with unlikely shake the position of Bitcoin or other mainstream tokens even if their ICO shoots to the moon. Since the metric uses the combined market cap of TOP 125 tokens, there must be a much bigger shift than an increase of value of any single token. It means that you can miss out on an opportunity to make bank if you play your cards too safe.

Conclusion: Why Understanding Bitcoin Dominance is Essential for Crypto

Retail traders who want to focus on day trading and scalping exclusively may not recognize the value behind understanding the relative positions of mainstream coins in the market. While slow shifts in BTC dominance rarely concern people who do not think outside a very narrow time scope, it can be extremely informative for people who are in the crypto industry for years to come.

It can be a good tool when you are trying to find an appropriate moment to focus on riskier investments, but you should be ready to start preparing ahead of time to ensure that a slow shift in dominance actually provides you a good signal to start divesting from BTC and stablecoins into new ICOs with higher risk profiles.

It is quite important to understand that the crypto industry is quite tight with all cryptocurrencies affecting each other to a certain degree. A sudden collapse of Bitcoin would be detrimental for the whole industry, but even something as small as Shiba Inu losing its market position can have a lasting effect of many other correlated tokens like DOGE.

Bitcoin Dominance chart is a great example of a tool that can be incredibly valuable to a knowledgeable investor who likes to make calculated moves after meticulous consideration of all future outcomes. It can also be absolutely useless for those who do not understand the value of understanding intimate correlations between different digital assets.


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