Bitcoin Dominance & how to use it to trade effectively in and out of Bitcoin & Altcoins
What is Bitcoin Dominance?
Bitcoin dominance, as its name implies, reflects the dominance of Bitcoin compared to the total market. Its calculation is the Asset Market Cap (supply * price) divided by the Total Market Cap (sum over all assets of asset supply * price) as a percentage. Dominance is best seen as a tool to give a perspective of how the crypto space is evolving. At the start when bitcoin was the largest and only one of few cryptocurrencies, its dominance was close to 100%. As new cryptocurrencies came into existence (most notably Ethereum), its dominance started to drop.
How to use the Bitcoin Dominance Chart for Trading
Bitcoin dominance can be related to ‘alt seasons’, in which altcoins gain a lot of market share compared to Bitcoin and thereby reducing the Bitcoin dominance.
This happened often after market cycle peaks where we have had Ethereum tsunamis and alt seasons.
Note that the dominance is not directly related to bull- or bear markets because it is a dimensionless ratio; if Bitcoin’s price falls but the rest of the total market cap falls at a similar rate, then Bitcoin dominance remains equal.
When Bitcoin Dominance is high – Consider selling Bitcoin & buying Altcoins which will be undervalued relative to the Bitcoin price
When Bitcoin Dominance is low – Consider buying Bitcoin & selling Altcoins which will be overvalued relative to the Bitcoin Prices