In the crypto world, Bitcoin (BTC) is still the boss. Even though there are about 1800 different types of coins today, Bitcoin still has a ruling reputation.
So, if you’re stepping into the crypto world for the very first time, we recommend educating yourself about Bitcoin dominance and its power. It’ll help you make some very wise and calculated decisions.
We’ve formulated this post on the same note. Here, you will find everything that you need to know about BTC dominance and how you can use it to minimize risk when investing in crypto.
Let’s get started!
What Is Bitcoin Dominance?
In simple words, Bitcoin dominance is Bitcoin’s influence in the overall crypto market. In other words, it is Bitcoin’s share and impact on the crypto industry.
But how do you calculate it? And why is it even important to know?
Well, you can calculate BTC dominance using the following formula:
Bitcoin Dominance: Bitcoin Market Cap / Total Crypto Market Cap
The Real Bitcoin Dominance Index follows a slightly different formula to calculate BTC dominance. It is as follows:
Bitcoin Dominance: Bitcoin Market Cap / (Market Cap of other PoW Cryptocurrencies + Market Cap of BTC)
A lot of traders trust the Real Bitcoin Dominance Index. And that’s mostly because it works by the Proof-of-Work mechanism.
However, to understand either of these, you need to familiarize yourself with the concept of market cap.
Market cap is a commonly used term for market capitalization. It typically refers to the market value of a company using its outstanding stocks. For example, if company X sells its shares at $10 and the currently outstanding shares are 50, then, the market cap of company X will be $500.
We calculate the market cap for Bitcoin and other currencies in a similar manner. So far, Bitcoin has held the highest market cap since it’s the oldest currency in the crypto world, making it relatively stable and trusted.
Since it’s got the highest market cap, it also has the highest dominance. As of May 2022, Bitcoin’s market cap dominance was slightly over 44 percent.
Importance Of BTC Dominance
Here are a few reasons why knowing and understanding Bitcoin dominance is important for every crypto investor and trader:
- Helps determine the worth of alternative currencies
- Helps predict BTC positioning in the near future
- Guides and improves crypto trading and investment skills by allowing for wise, data-backed, and calculated decisions
So, naturally, this is a game-changing and important metric and one that is important to consider when buying or selling Bitcoin or alternate coins.
Strategies To Use BTC Dominance In Crypto Trading
There are two major strategies in which you can use BTC dominance to your advantage and make some of the best crypto decisions. These include:
Strategy 1: Identify Stronger Trends
You can use Bitcoin dominance to analyze whether Bitcoin will have a stronger trend in the coming days or altcoins. For example, you can use it in the following ways:
- Bitcoin Dominance Index with the ratio in uptrend + Bitcoin in uptrend = Best time to buy Bitcoin
- Bitcoin Dominance Index with the ratio in uptrend + Bitcoin in downtrend = Best time to sell altcoins
- Bitcoin Dominance Index with the ratio in downtrend + Bitcoin in uptrend = Best time to buy altcoin
- Bitcoin Dominance Index with the ratio in downtrend + Bitcoin in downtrend = Sell Bitcoin
The Bitcoin dominance index ratio can serve as your technical indicator to make the right buying and selling decisions.
Strategy 2: Monitor Extreme Highs & Lows
Generally, Bitcoin dominance has fluctuated from 35% (minimum) to 74% (maximum). There’s a very slim chance it will fall or rise any further than that. But you can use the dominance ratio to monitor the trend closely and make decisions accordingly.
Here are a few examples of how it works:
- High Bitcoin Dominance Index Ratio + Bitcoin in uptrend = Sell Bitcoin
- High Bitcoin Dominance Index Ratio + Bitcoin in downtrend = Buy altcoins
- Low Bitcoin Dominance Index Ratio + Bitcoin in uptrend = Sell altcoins
- Low Bitcoin Dominance Index Ratio + Bitcoin in downtrend = Buy Bitcoin
These are not the only two strategies to use Bitcoin dominance to your advantage. We encourage you to explore more and share your findings with us in the comments below!
Factors Affecting BTC Dominance
BTC dominance is Bitcoin’s influence in the market. Apart from its performance, several external factors affect BTC’s dominance. These are:
- New crypto coins in the market
- Increased use of stablecoins to purchase crypto assets
- Increased investments in volatile altcoins for better profits
Suggested Read: Everything You Must Know About Stablecoins
All three of these factors negatively impact BTC dominance. They dilute Bitcoin’s influence in the market and reduce its share. However, when reversed, these factors may favor Bitcoin dominance and contribute to a positive and rising Bitcoin dominance ratio.