With the proliferation of cryptocurrency for investors, traders are always looking for new ways to find trends in cryptocurrency. The Bitcoin dominance rate is one of the tools traders have recently integrated to aid in identifying the differences in overall market trends between Bitcoin and all other currencies.
If appropriately utilized, Bitcoin (or BTC) dominance can assist you in determining whether trading alternative coins is more lucrative than trading Bitcoin. The phrases “Bitcoin dominance,” “Bitcoin dominance ratio,” and “Bitcoin dominance index” are often interchangeably used and are the same as “Bitcoin” and “BTC.” In this article, we’ll talk about the definition of Bitcoin dominance, the factors that impact the ratio, and various strategies you can use when making decisions regarding investments.
What Is Bitcoin Dominance?
Bitcoin dominance is measured by the proportion of and the value of the market of Bitcoin to the market cap of the cryptocurrency market. If we compare this ratio with the current trend of Bitcoin, we can find out more about the market’s opportunities.
To better understand the implications of the nature of Bitcoin dominance means trading, it is essential to know the concept of market capitalization -and why it’s crucial.
What Is Crypto Market Capitalization?
For cryptocurrencies like Bitcoin, market capitalization (“market cap”) is the value of all coins that have been extracted. Market cap is calculated by multiplying the number of coins in circulation by the current price of a single currency.
As of November 2021, there were 18.881 million bitcoins available. If the value of Bitcoin was at $60,000, the market value is 18.881 million times $60,000= $1.133 trillion. That means that the amount of value Bitcoin is $1.133 trillion. The Bitcoin system is $1.133 trillion.
How to Trade Crypto Using BTC Dominance
Many ways to leverage BTC power to benefit from its dominance. The two main sectors of the cryptocurrency market include Bitcoin and altcoins. We can utilize the ratio to determine which one of these two sectors is more likely to trade. We can also anticipate extreme readings and then change by pivoting from levels and highs.
Strategy 1: Using BTC Dominance to Determine the Strongest Trend
Strategy 2: Trading the Extreme High and Low Readings
Factors That Influence Bitcoin Dominance
In the beginning, Bitcoin dominance would hover around 95% or higher in the world of crypto because few altcoins drew investment. But as other altcoins began to attract attention, Bitcoin’s dominance diminished.
For instance, after the ICO (initial coin offering) trend exploded in 2017, investments in altcoins increased, and Bitcoin dominance fell to an all-time low of 35 percent. Then, in 2018, Bitcoin dominance rallied back to nearly 70% after a number of the altcoins that went under failed.
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If we carefully examine the formula behind the ratio referred to by the name Bitcoin dominance, we’ll discover two variables in the equation:
- Market cap of Bitcoin
- Market cap total of the entire market for cryptocurrency
These are two significant factors that affect the direction of Bitcoin over the other currencies.
Is Bitcoin Dominance a Reliable Indicator?
Markets in crypto are complicated ecosystems. Thus, no system could be reduced to a single indicator. Bitcoin dominance is only one indicator that defines the current market situation.
Therefore relying entirely on Bitcoin, the dominance as an index is likely to result in losses or inconsistencies.
A drawback is that it’s only been recently that the number of altcoins increased, pushing the dominance ratio down. Therefore we don’t have an abundance of past data to determine consistent patterns.
Furthermore, if the amount of altcoins grows soon, it’s possible that the ratio could decrease in size until it reaches the new lowest levels. If this happens, this Bitcoin dominance index might become useless.
The Bottom Line
The Bitcoin dominance ratio is a valuable tool for understanding the trends in the cryptocurrency market. Based on the trend patterns within the percentage and the price of Bitcoin, a trader can tell if the most robust movement is in Bitcoin or other altcoins. Bitcoin.
Bitcoin dominance has its drawbacks. Because the crypto market is still in its infancy, more altcoins may be available in the coming years, making the index outdated. At least for the moment, it could help traders better understand the market’s conditions for crypto better.