What is BTC Dominance (BTC.D)? How to apply BTC Dom to analyze Crypto

5Mni...e7Bz

26 Jan 2024

Bitcoin (BTC) is the first and most prominent coin in the crypto market when it comes to capitalization and trading volume. All other altcoins, to a greater or lesser extent, are dependent on BTC trends, and the Bitcoin Dominance index can indeed serve as a useful indicator when traders look for trading opportunities on the cryptocurrency. market.

So what is Bitcoin Dominance? Let's learn about this special indicator as well as the factors that influence it and some strategies you can implement when making your investment decisions.

What is BTC Dominance?

BTC Dominance (or BTC.D, BTC Dom) is the ratio of Bitcoin's market capitalization to the total capitalization of the entire cryptocurrency market. This indicator allows you to determine whether Altcoins are in an uptrend or downtrend compared to Bitcoin:

When BTC Dominance increases, Altcoins will usually tend to go down.
When BTC Dominance drops, Altcoins will increase in value relative to BTC.

This means that in most cases, you will want to hold more BTC (or stablecoins) when Bitcoin Dominance is in an uptrend, and hold more altcoins when Bitcoin Dominance is in a downtrend.

Of course, Bitcoin Dominance can have different effects on different time frames, and the market increases or decreases are not entirely due to the influence of Bitcoin Dominance. The nature of BTC Dominance is a ratio, not an absolute term.

In many cases, based on BTC Dominance, we can determine whether to take profits or not for both BTC and Altcoin.

If we notice that money is being withdrawn from BTC, that is, BTC Dominance decreases, then we should consider taking profits.
Similar to Altcoins, if BTC Dominance increases but capitalization remains unchanged, we need to consider gradually taking profits from Altcoins.

Change Bitcoin dominance rate from January 1, 2021 and July 2, 2021

For example: As shown above, we can see Bitcoin's dominance rate in two records, January 1, 2021 and July 2, 2021.

On January 1, 2021, BTC's Dominance was 70.35%, which means that at this time, the demand for Bitcoin is 70.35% and Altcoin is 29.56%. The market is completely dominated by Bitcoin. This number has changed over time. After 6 months this dominance rate decreased to 46.26% and Altcoin increased to 53.74%.

How to calculate BTC Dominance (BTC.D)

Formula to calculate BTC Dominance:

BTC.D = Bitcoin Market Cap (BTC) ÷ Market Cap of All Other Cryptocurrencies

For example: Altcoin total market capitalization is $1,600 billion and BTC market capitalization is $700 billion
=> BTC.D = 700 ÷ 1,600 ≈ 43,8 %

However, now, we do not need to calculate BTC.D manually anymore. You can easily know what the current Bitcoin Dominance index is thanks to tools like Tradingview because it is one of the important indicators used by many traders to determine market trends and plan trades. Translate for yourself.

For example:
Illustration of BTC DOM
From the picture above we can see the following:
BTC Dominance Rate

Meaning of BTC Dominance (BTC.D)

The most important thing about BTC Dominance is that it can help you understand the flow of money to predict market moves.

When BTC Dominance increases, it is a sign of money flowing into BTC.
When BTC Dominance drops, money flows into Altcoins or Stablecoins .
If total market capitalization increases, it is a sign of money entering the Crypto market.
If total market capitalization is decreasing, it is a sign that money is leaving the market.

This is especially useful when you intend to invest in Altcoins. If you decide to only invest in Bitcoin, you do not necessarily need to care about BTC.D, because whether this index increases or decreases, it will not have much effect on the value of Bitcoin.

Track Bitcoin Dominance. Source Tradingview

Besides, tracking the Bitcoin Dominance index helps you grasp the signs of the coming " Altcoin season " . When this index began to show signs of decreasing, the entire cryptocurrency market capitalization increased. It shows that Bitcoin capital is being used to buy Altcoins or that Altcoins are being bought by new investors more than Bitcoin.

If only the Bitcoin Dominance index drops but the total market capitalization does not increase, this could be a "fake signal" for Altcoin Season.
On the contrary, if the total market capitalization increases but the Bitcoin Dominance index does not decrease, it is not considered Altcoin season.

These two factors must appear together to be considered a sign of Altcoin season . However, this is only a relative division, the market is not required to follow this rule.

In addition, in terms of data research, an increase in the BTC Dominance percentage index also signals a new bull run.

As huge new funds are poured into Bitcoin, altcoin holders also gradually change to Bitcoin to prepare for the new increase. After the Bitcoin cycle increases, money flows from Bitcoin to Altcoins.

During the time when Bitcoin was the only cryptocurrency tradable on exchanges, its Dominance was almost 100%.

Today, with the advent of more cryptocurrencies, BTC Dominance has certainly decreased a lot. But this is not necessarily good or bad. It is just a tool to give us a perspective on how the cryptocurrency space is evolving.

Correlation between BTC Dominance and Historical Altcoin Prices

During the initial period of cryptocurrency emergence, Bitcoin Dominance often hovered around 95% or higher, as there were very few Altcoins attracting inflows at this time. However, as more and more Altcoins appear and receive attention from investors, the value of Bitcoin Dominance has decreased.

Correlation between BTC.D and altcoin boom time. Source: Kyros Venture

When the ICO craze took off in 2017, investing in Altcoins started going mainstream and Bitcoin Dominance dropped to an all-time low of 35%. Starting in 2018, Bitcoin Dominance rebounded to nearly 70% as many altcoin projects were unable to continue operating.

By March 2019, BTC.D once again increased to 50.3%. Many people believe that the decrease in ETH price led to many people switching to investing in BTC to preserve capital, which is the reason why the BTC Dominance index increased.

Starting in 2021, Bitcoin Dominance began to plummet again as investment flows into altcoins increased along with negative news surrounding Bitcoin's energy usage and China's shutdown of Bitcoin mining such as MarginATM reported ( here ), causing tension in the market.

BTC Dominance Tracker (BTC.D)

You can easily track BTC.D at some popular websites such as: TradingView , CoinMarketCap, CoinGecko , Coin360,...

The image below shows the BTC Dominance index being updated on CoinMarketCap , accounting for 46.1% of the entire market.

You can learn about those two tools through:

Trading strategy with BTC.D

As I said above, Bitcoin is the coin leading the market, and the BTC Dominance index measures Bitcoin's influence. There are many ways to use BTC Dominance to bring you profit.

Combining the Bitcoin Dominance ratio and BTC price, we can determine what the current market trend is like? Should I invest in Bitcoin or altcoins?

This index is extremely influential for all cryptocurrencies. Traders can use BTC Dominance combined with market capitalization and Altcoin developments to predict prices.

The theory sounds complicated, but the relationship between Bitcoin and prices in the crypto market is quite simple. In general, the market results will be divided into the following cases:

Case 1: When BTC Dominance increases - Correspondingly, the price of BTC increases or the number of BTC circulating in the market increases.

If Altcoin prices increase, it means that there has been a new amount of money poured into the market, causing the entire market capitalization to increase simultaneously. This is considered the healthiest price increase because the market is regaining confidence.
If Altcoin prices decrease, this is the time for money flow from Altcoins to Bitcoin. Investors who are investing in Altcoins feel it is time to take profits on these coins, so they decide to sell them and buy back Bitcoin. Additionally, it could be the case that there is outside money flowing into the market but only to buy BTC.

Case 2: When BTC Dominance decreases - Correspondingly, the price of BTC decreases or the number of BTC circulating in the market decreases.

If Altcoin prices increase, Bitcoin is creating an accumulation base to prepare for a new price increase, so its price will decrease or remain unchanged.
If Altcoin prices decrease, this is considered the worst scenario of the market - the Downtrend phase . Because of certain information, investors no longer trust cryptocurrencies so they decided to withdraw capital from the market. Market capitalization simultaneously decreased.

Once a trend has been established, you can identify trading opportunities using price action, candlestick patterns and/or other technical indicators.
How to take advantage of BTC Dominance?
Now you know how BTC Dominance affects the market. Take advantage of that to make a profit.

With Altcoin: Buy Altcoin when Bitcoin Dominance increases (at this time Altcoin Dominance will be low) and take profits when Bitcoin Dominance hits the bottom (at this time Altcoin Dominance will increase).
With Bitcoin: Buy BTC when Bitcoin price increases and BTC.D rate increases. This means that BTC inflow is increasing again. At this time, you should consider buying BTC to earn profits or take profits if you are holding BTC.

Strategy to respond to developments in BTC Dominance

As the market results I mentioned above, when BTC Dominance increases, money from Altcoins will pour into Bitcoin but the total capitalization does not increase.

At this time, the prices of Altcoins often tend to fall sharply, although there are still coins that grow despite the market's downtrend thanks to good news or the explosion of low-cap junk coins, but the number This coin is quite few.

In this case, long-term investors with altcoins with good potential evaluation such as Ethereum, Binance Coin, Litecoin, etc. should continue to hold. In addition, you can consider buying more to increase the number of coins because at this time the prices of Altcoins are very good.

Cash flow and trading strategies. Source: Coin98 Analytics

For traders, they will usually follow the market trend, that is, change from Altcoin to Bitcoin (or USDT ) and wait and watch the next trend.

Conversely, if BTC Dominance decreases, capital is being transferred to Altcoins but the total capitalization does not decrease, signaling an upcoming uptrend in the altcoin market. In this case, long-term investors holding good Altcoins may start taking profits or continue to hold with the expectation of much better prices in the future.

Traders also started trading BTC/Altcoin pairs more frequently to profit during this altcoin bull run.

Limitations of BTC Dominance (BTC.D)

Any indicator has its pros and cons, Bitcoin Dominance is no exception to that rule. Normally, analyzing BTC.D is often based on technical analysis and market psychology analysis . And every school and method of analysis has errors. We need a risk prevention strategy .

Same chart and parameters, but each person has a different, even opposite, vision and assessment. Bitcoin Dominance is the same, it is only relative and cannot be 100% accurate.

For example: Looking at small frames, BTC Dominance may be in a downtrend, but larger frames such as D1, W are still in an uptrend.

Despite the index's flaws, Bitcoin Dominance serves as a good indicator for traders .

Is BTC Dominance a reliable indicator?

Not only the cryptocurrency market, any financial market is equally complex and difficult to predict. Therefore, it is impossible to predict the trend of the entire market using just a single indicator. Traders need to combine BTC Dominance with different indicators such as support - resistance lines , trendlines , MA,...

Another problem is that Market Cap is currently calculated by the number of coins in circulation multiplied by its price. However, the prices of Altcoins, especially small altcoins, are easily manipulated. The difference between the amount of coins issued and the amount of coins actually circulating on the market is also a problem.

This can lead to the Bitcoin Dominance index being inaccurate because this ratio is only calculated based on statistics on the amount of coins released to the market announced by projects.

In addition, if the number of altcoins continues to increase in the future with the explosion of ICO, IDO, IEO,... in the near future, the Bitcoin Dominance index may no longer be useful.

Learn more about 05 risk management methods in Crypto .

Conclude

Bitcoin Dominance is a great tool to help traders understand trends in the crypto market. However, it also has its own limitations. Since the cryptocurrency market still has a lot of growth potential, it is possible that many Altcoins will appear in the near future, making this index obsolete. But at least for now, it can help traders understand market conditions better