Bybit Learn
Bybit Learn
Nov 27, 2021

Bitcoin (BTC) Dominance: How It Changes the Way You Trade Crypto

With the explosion of cryptocurrencies to invest in, traders are constantly seeking out new tools to discover trends within crypto. The Bitcoin dominance ratio is a tool that traders have recently incorporated to help them spot differences in general market conditions between Bitcoin and all of the other coins.

When utilized correctly, Bitcoin (or BTC) dominance can help you determine if trading altcoins is a stronger trend than trading Bitcoin. The terms “Bitcoin dominance,” “Bitcoin dominance ratio” and “Bitcoin dominance index” are frequently used interchangeably, as are “Bitcoin” and “BTC.” In this article, we’ll discuss what Bitcoin dominance is, as well as what factors influence the ratio and some strategies you can implement in making your crypto investment decisions.

What Is Bitcoin Dominance? 

Bitcoin dominance is the ratio between the market capitalization of Bitcoin to the total market cap of the entire cryptocurrency market. When we compare this ratio to the trend of Bitcoin itself, we can learn more about what opportunities the current market environment offers.

To gain a better understanding of what Bitcoin dominance is, traders need to understand what market capitalization is — and why it’s important.

What Is Crypto Market Capitalization?

In the case of a cryptocurrency such as Bitcoin, market capitalization (“market cap”) means the total value of all the coins that have so far been mined. The market cap is calculated by multiplying the number of coins in circulation by the current market price of a single coin.

For example, as of November 2021, there were approximately 18.881 million bitcoins in existence. If the price of Bitcoin was trading at $60,000, then the total market cap would be 18.881 million x $60,000 = $1.133 trillion. This means the total value of the Bitcoin network is $1.133 trillion.

The $1.133 trillion figure by itself doesn’t have as much meaning until you begin to compare it to other markets. For example, the total estimated value of the gold market is near $10 trillion. This means that Bitcoin’s value is about 11% of that of gold. An investor can then determine if they feel the Bitcoin network will be worth more over time, or if it’s becoming overvalued.

One of the benefits of cryptocurrencies is that it’s easy to determine how many coins are in existence, as well as the price of those coins. As a result, determining the total market cap of the entire crypto market is fairly simple to find and graph on a chart.

The Relationship Between Bitcoin Dominance and Market Cap

Bitcoin dominance uses Bitcoin’s market cap and the total cryptocurrency market cap in its calculation.

It’s straightforward to determine and chart both of the figures used in this ratio. Below, we see the Bitcoin market cap (left chart), the total crypto market cap (middle chart), and the Bitcoin dominance (right chart).

Generally speaking, the shape and direction of the total crypto market cap will follow that of Bitcoin. This is partly due to Bitcoin’s influence over the entire crypto market since it’s the first, largest and most widely recognized cryptocurrency.

As crypto investors and traders, we take it as a given that most people in the world have little knowledge about the breadth of the crypto market. Hence, they may believe Bitcoin is the only cryptocurrency that exists.

As a result, if an appetite exists to buy crypto, Bitcoin and the whole crypto market tend to rise, driving both market caps higher. If risk aversion were to hit the crypto market, then most large cryptocurrencies would liquidate, reducing the total market cap.

Factors That Influence Bitcoin Dominance

In the early days of cryptocurrency, Bitcoin dominance would hover at about 95% or greater, as there were very few altcoins that attracted investment. However, as other altcoins began to garner interest, Bitcoin’s dominance fell. 

For example, when the ICO (initial coin offering) craze bubbled up in 2017, investment in altcoins began to grow, and Bitcoin dominance dropped to a low of 35%. Beginning in 2018, Bitcoin dominance rallied back to a high near 70%, as many of those altcoins went bust.

Beginning in 2021, Bitcoin dominance began to plummet again as an investment in altcoins increased with negative news surrounding Bitcoin’s energy usage and China’s eradication of Bitcoin mining, which placed a strain on investment.

If we closely inspect the formula that creates the ratio known as Bitcoin dominance, we’ll find these two variables included within the calculation:

  • Market cap of Bitcoin
  • Total market cap of the entire cryptocurrency market

These are the two main influences that move the Bitcoin dominance ratio.

Bitcoin’s Fluctuation in Price

Bitcoin’s market cap is the numerator of the Bitcoin dominance ratio. Since the number of bitcoins in circulation is fairly steady and won’t grow much, the biggest influence on Bitcoin’s market cap is its price.

The relationship between Bitcoin’s price and market cap can be seen in the chart above. Notice that the market cap closely follows and resembles the movement in Bitcoin’s price. As Bitcoin’s price trends higher, its market cap tends to trend higher proportionately.

However, just because Bitcoin’s market cap is trending higher doesn’t mean that Bitcoin dominance is increasing. Bitcoin’s market cap is just the numerator of the ratio. The speed at which Bitcoin’s market cap is moving is compared to the second biggest influencer of the ratio: the altcoin market cap.

Altcoins Fluctuation in Market Cap

The denominator of the ratio is the total market cap of all cryptocurrencies. This figure is a little trickier to calculate, due to the sheer number of cryptocurrencies available. Currently, there are more than 12,000 cryptos, which is a huge number to track. Fortunately, several websites automatically perform this calculation.

There are times when the price of Bitcoin is trending higher, increasing Bitcoin’s market cap significantly. Likewise, there are other times when investment in altcoins is trending higher faster than that in Bitcoin.

On the chart above, notice how the first trend on the left (in black) is much larger and stronger than Bitcoin’s corresponding increase in market cap on the right. This suggests that altcoins’ collective evaluation is increasing more rapidly than the valuation of Bitcoin, implying that altcoins are heavily influencing the total market cap.

Then, after a correction, the trend on the left (in blue) continues higher at a faster rate than Bitcoin’s market cap (right-hand chart). As a result, the proportion of the total crypto market valuation attributable to Bitcoin has been diluted, and is becoming smaller. 

How to Trade Crypto Using BTC Dominance

There are many ways to use BTC dominance to your advantage. The two general sectors within cryptocurrency are Bitcoin and altcoins. We can use the ratio to determine which of these two is a stronger trend to trade, and we can also anticipate extreme readings and trade a pivot from the highs and lows.

Strategy 1: Using BTC Dominance to Determine the Strongest Trend

Traders can use the Bitcoin dominance ratio to determine whether Bitcoin is the stronger trend or whether investing in altcoins has greater potential. The BTC dominance ratio identifies which trend may outperform the other so that a trader can position accordingly.

First, determine the trend of BTC dominance. You can use TradingView’s chart to view the index.

Second, determine the price trend of Bitcoin in a similar time frame.

Finally, use this table to help you determine a strategic bias.

BTC Dominance IndexBitcoin’s TrendSignal
Ratio in uptrendBitcoin in uptrendBuy Bitcoin
Ratio in uptrendBitcoin in downtrendSell altcoins
Raio in downtrendBitcoin in uptrendBuy altcoins
Ratio in downtrendBitcoin in downtrendSell Bitcoin

Once the bias has been established, you can identify trading opportunities using price actioncandlestick patterns and/or other technical indicators.

Strategy 2: Trading the Extreme High and Low Readings

Between 2018 and 2021, Bitcoin dominance has ranged from a low of 35% to a high of 74%. With the universe of cryptocurrencies expanding constantly, it’s unlikely that the value of this ratio will increase much above 74% in the future. On the other hand, a dominance ratio below 35% suggests the total value of altcoins is expanding rapidly compared to that of Bitcoin.

Another strategy to consider is trading the appropriate market when the ratio reaches extremes. When the ratio approaches these historic levels, a reversal of the ratio is at risk. Therefore, when the ratio reaches an extremely high reading, markets are ripe for the ratio to fall. On the other hand, an extremely low reading may yield its way to an increase in Bitcoin dominance.

The simple reason for this is that investors will gauge the value of a cryptocurrency based on its peers. If the investment has been pouring into altcoins for some time, then the potential for appreciation and value of Bitcoin may be more likely.

Traders can use the table below as a guide to determine which markets to focus on when BTC dominance is at risk for a reversal.

BTC Dominance IndexBitcoin’s TrendSignal
Ratio at a historic highBitcoin in uptrendSell Bitcoin
Ratio at a historic highBitcoin in downtrendBuy altcoins
Ratio at a historic lowBitcoin in uptrendSell altcoins
Ratio at a historic lowBitcoin in downtrendBuy Bitcoin

By definition, it’s seldom that Bitcoin dominance will reach these historic highs and lows. However, when the ratio does reach extreme levels, it could offer some good trading opportunities. It’s important to manage your risk, however, because the ratio has been known to breach these historic levels.

Is Bitcoin Dominance a Reliable Indicator?

Crypto markets are complex ecosystems. Therefore, no system can be simplified down to the use of one indicator. Bitcoin dominance is just one of many possible gauges that describe the current market environment.

As a result, solely relying on Bitcoin dominance as an index will likely lead to losses and/or inconsistent results.

One shortcoming is that only recently has the number of altcoins truly proliferated, dragging the dominance ratio lower. Accordingly, we don’t have a large amount of historical data from which to identify recurring trends.

Additionally, if the number of altcoins continues to expand into the future, then it’s possible that the ratio would become smaller and smaller, reaching new lows. If this happens, then the Bitcoin dominance index may no longer be useful.

The Bottom Line

The Bitcoin dominance ratio is an excellent tool to help you understand trends within the crypto market. Depending on the trends within the ratio, and on Bitcoin’s price, a trader can determine if the stronger trend is with altcoins or Bitcoin.

Bitcoin dominance is not without its limitations. Since the crypto market is so new, it’s possible that even more altcoins will come online in the next few years, rendering the index obsolete. But at least for now, it can help traders understand crypto market conditions better.