Crypto traders are actively looking for different tools to analyze the market and make the right investment decisions, one such tool is the Bitcoin dominance index. This index helps to evaluate various market conditions to find the stronger trend between Bitcoin and Altcoins. The measure of how much of the total value of all crypto consists of Bitcoin is known as BTC dominance or Bitcoin dominance.

How does BTC dominance work?

The fundamental principle behind BTC dominance is that if the market share of BTC increases, the value of altcoins will reduce. Conversely, if the market share of BTC decreases, the value of altcoins increases. Bitcoin dominance is also known as the BTC dominance ratio or the Bitcoin Dominance index.
You can determine the level of BTC dominance by analyzing the total market capitalization of BTC and comparing it with the total market capitalization of all other cryptos. The total market value of crypto is known as its total market capitalization. The total number of crypto coins in circulation is multiplied by their current price to determine the total market capitalization of crypto.

How is BTC dominance calculated?

You need data on Bitcoin’s market cap and the overall crypto market cap to calculate BTC dominance. Divide the BTC market cap by the global crypto market cap to determine the percentage of funds in the market that are stored in BTC. For example, at the time of writing, the BTC market cap is $559 million, while the global crypto market cap is $1.2 billion. So the percentage of Bitcoin dominance is around 46%. In other words, 46% of the Global market cap is BTC.

Ways to use BTC dominance in crypto tradingTrade at market extremes using BTC dominance

By analyzing the crypto market between 2017 and 2021, we find that BTC dominance went as high as 75% and as low as 35%. You can expect Bitcoin’s price to fall when the ratio is close to 75%. Conversely, when BTC’s dominance is close to 35%, you can expect Bitcoin’s price to move upward. This is just one of many indicators. You should do your due diligence and look at other indicators before investing in crypto.

Altcoin season and other crypto price trends

Altcoin season is when the price of alternative crypto coins increases compared to BTC for an extended period. This period occurs when the price of BTC falls and crypto inventors start investing in another crypto, commencing a new bull run for altcoins.

Factors Influencing BTC Dominance

BTC’s dominance changes when its market cap increases or drops relative to the other cryptos. Other factors may influence BTC dominance.

• More altcoin projects: Bitcoin dominance will decrease as the number of altcoin projects and NFT collections continues to rise. Bitcoin will remain the most valuable crypto, but more altcoin projects will dilute its dominance.
• Risk appetite: Crypto investors tend to diversify their portfolios during bull runs. They take a chance on riskier, smaller crypto projects during this time. On the other hand, investors will put their money back into Bitcoin during a bear run.
• Stablecoin market cap: Many of us perceive BTC to be the safest crypto, but stablecoins have become attractive to investors looking for secure crypto. The more crypto investors invest in stablecoins, the lower the BTC dominance.

What happens when BTC dominance drops?

Bitcoin dominance usually drops when the crypto market is bullish. It can also drop when new crypto projects attract investors.

What happens when BTC dominance goes up?

BTC dominance usually increases when the crypto market is on a bear run. Investors usually shift their investments back to BTC during a bear run.

Why use BTC dominance?

Bitcoin has the power to influence the crypto market because it is the largest crypto token today. It is vital to understand the impact of Bitcoin to make good investment or trading decisions.

Conclusion

Bitcoin dominance is an important tool to analyze the crypto market. It shows how strong BTC is compared to other cryptos in the market. It can provide vital information about the crypto market and help you devise investment strategies. Due to the rise of other crypto tokens like Ethereum and Solana, Bitcoin’s dominance may lose its relevance as a tool to analyze the crypto market. BTC dominance does not guarantee how crypto tokens will perform. This tool should be used as a guide, along with other tools and indicators.