BTC Dominance is considered as the ratio of bitcoin's market capitalization to that of the rest of the cryptocurrency market.
Some crypto investors and traders use BTC dominance to guide them while adjusting their trading plans and portfolio structures. In simple terms, BTC dominance gives insight into the general market trend.
For Bitcoin, market capitalization is calculated by multiplying the number of Bitcoin mined so far and the recent market price. Accordingly, the formula for calculating BTC dominance is: "Bitcoin dominance = Bitcoin market cap/ Total cryptocurrency market cap."
Factors Affecting BTC Dominance
1. Shifting Trends
Bitcoin dominance used to hover above 90% before the explosion of altcoins in the market. When most users and investors became interested in altcoins, bitcoin lost some of the attention directed towards it to other assets with better price shifts and new exciting projects.
Many altcoins are involved in different sectors unlike bitcoins. Such sectors include art, gaming, and decentralised financial services that do more than just transfering money.
With the current trend, consumers might be more interested in trading around a certain crypto project. For example, the increased use of NFT may have contributed to the drop in BTC dominance.
2. Bear or Bull Markets
Over the past many years, stablecoins have been greatly adopted, increasing their popularity, putting pressure on BTC dominance.
Stablecoins are usually used to protect the funds of crypto investors during falling prices in a bear market or amid volatility.
Also, crypto investors and traders use stablecoins most of the time to lock in profits without changing their crypto to fiat. When funds move into stablecoins and out of the BTC market, BTC dominance could drop.
The opposite happens in a bull market. When the market is up, crypto traders and investors can move their funds from stablecoins into more volatile assets that give more trading opportunities, such as Bitcoin. However, the general effects of favourable market situations on BTC dominance are context-dependent.
3. Rise of New Crypto Coins
At times, when new coins enter the market, the market attention shifts to them rather than to BTC, causing BTC dominance to reduce. Nonetheless, there is a possibility that these altcoins might lose popularity after the market hype reduces.
Using BTC Dominance While Trading
Wyckoff method- This method is a collection of principles made for traders and investors in traditional financial markets. Some of these principles like the law of cause and effect can be used while looking for profit opportunities with BTC dominance.
According to this method, trading behaviour is grouped into "accumulation, markup, distribution, and markdown."
The Wyckoff method is used by many traders and investors to pinpoint a market trend, measure the likelihood of a trend reversal, and time exchanges.
Experienced traders and investors mostly use the Wyckoff method to find and choose stronger trends. Examples of scenarios where the Wyckoff method is applied in the market are using BTC dominance to look for altcoin seasons and using BTC dominance with recent bitcoin cost.
Note that BTC dominance does not guarantee bitcoin's performance or other crypto; instead, it simply acts as a guide to help traders strategize their trading plans.
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