The Bitcoin Dominance Index or Bitcoin Dominance Ratio is an indicator that traders can use to quickly get a feel of Bitcoin’s value relative to that of the whole cryptocurrency market. This index takes Bitcoin’s market capitalization compared to the market cap of every other digital asset. Essentially, you have a tool to compare BTC’s market cap against Altcoins’ market cap. It is hard to pindown the origins of the index and who initially created it. What seems sure is that it was originally created to illustrate just how important Bitcoin is in the crypto economy.
Bitcoin is the world’s largest cryptocurrency by market capitalization (market cap). Therefore, it generates a huge amount of the crypto trading volume in the whole market. If we add up the market cap of all existing cryptocurrencies, we can loosely calculate the value of the industry. Bitcoin dominance refers to the ratio between the market cap of BTC against the rest of the cryptocurrency markets. Given that Bitcoin has been the largest cryptocurrency for many years and for some time the only in existence. Naturally, its dominance in the past was much closer to 100% than it was today. The Bitcoin dominance has dropped rapidly as new cryptocurrencies and tokens launch. The significant drop happened during the increased popularity of Ethereum and the introduction of the ERC20 token standard.
Why is the Bitcoin Dominance Ratio important?
Traders will be quick to tell you that watching the BTC dominance index is how to predict a Altseason rally. Which is a period of time where altcoins gain market share relative to Bitcoin. Consequently, causing Bitcoin’s dominance ratio to go down. So the Bitcoin Dominance Index is for gaining an overall insight into the market along with the sentiment of traders. An asset’s price is a function of supply and demand. Thus, the ratio measures demand of BTC relative to demand for altcoins such as ETH, VITE, CHR, or ERD.
For example, if the price of Altcoins is going down and BTC is continuing to hold its value steadily. Then you could make an analysis that investors are buying Bitcoin to cut their losses. You could confirm this analysis by checking if Bitcoin’s market dominance is going up. This is important to know because it could indicate some of your favorite Altcoin’s prices may soon dip. In short, leading to trade opportunities to buy more at a favorable price.
What are the ratio’s pitfalls?
A market that is bullish or bearish will not always influence the Bitcoin Dominance ratio. If Bitcoin falls in price, but the whole cryptocurrency market is bleeding. Then the Bitcoin Dominance Index will stay the same. Critics are also quick to point out that it is an index using market capitalization. Which is a calculation with its own limitations. For example, estimates believe 30% of all Bitcoin may potentially be dormant forever. Therefore, they will never reach exchanges (abandoned in lost wallets) but they are still part of BTC’s market cap.
Additionally, hundreds of Altcoins have turned out to be scams that never delivered any working product. So why should these digital tokens be included in any calculation trying to estimate cryptos overall market value? It should also be pointed out, that market cap doesn’t mean an influx of money. As a rule, it is a measurement that is based on the asset’s circulating supply and current market price.
All things you should take into consideration when crypto trading using the Bitcoin Dominance Index. To conclude, when BTC was the only digital asset being traded on exchanges then the dominance would have been 100%. Today we see that its dominance is definitely less than 100% because there are many more cryptocurrencies in the space. However, this should not be seen as a positive or a negative thing. What it does is show us how the overall crypto space is growing and evolving.
Stay safe and trade well!