Simply put, Bitcoin dominance is a ratio that shows how much of the cryptocurrency market valuation belongs to Bitcoin. This ratio doesn’t always stay the same and changes along with the market conditions.
Some traders consider Bitcoin dominance while making their trading decisions as they believe this ratio follows specific trends based on the market situation.
In this article, you will learn about Bitcoin’s dominance, its history, and how it is used in trading.
The main factor that has an effect on Bitcoin dominance and can drive its value up or down is its spot market price. However, this is only if we assume that the market value of the rest of the assets stays the same and doesn’t change.
Considering this, Bitcoin dominance can partially tell us where the interest of investors and traders lies: are they dominantly interested in Bitcoin or are they willing to take on more risk with altcoins?
Altcoin is a market term that refers to any other crypto asset other than Bitcoin. During bull runs, traders’ and investors’ appetite for risk grows and they tend to get more interested in other crypto assets besides Bitcoin.
The growing demand for altcoins leads to an increasing market valuation which then decreases Bitcoin dominance, assuming that the demand for Bitcoin stays the same or increases slower than that of altcoins.
This market condition is famously known as the Alt Season, a period of time when altcoins show a better market performance than Bitcoin.
Bitcoin dominance can fall during bear markets as well. When the market is volatile and prices are not stable, market members exchange their cryptocurrencies for stablecoins, like Tether, which increases the demand for these assets, driving the price of other cryptos including Bitcoin down.
Stablecoins are a type of cryptocurrency that follow the price of a more stable asset like a fiat currency e.g. the US Dollar. Stablecoins come in different types and are designed in a way to keep their peg to the underlying asset at all times.
Check out our “What are Algorithmic Stablecoins?” article to learn more about algorithmic stablecoins which leverage algorithms to keep their value close to the base asset.
Bitcoin Dominance Over Time
Over the years, some traders realized they can use Bitcoin dominance alongside other indicators in their technical analysis to find trading and investment opportunities in the market.
For example, a falling Bitcoin dominance accompanied by a steady price can indicate that an altcoin season has started.
During this time, altcoins will outperform Bitcoin and traders can use this knowledge to manage their portfolios accordingly. On the other hand, an increasing price with growing dominance can signal an imminent Bitcoin bull run.
You should always remember that you cannot rely on Bitcoin dominance alone to decide how the market will behave in the future. It is merely a metric that gives us an idea of the overall market condition and helps us see where the interest of market members lies.