Bitcoin dominance is the term analysts and traders use to express how much of the crypto market capitalization consists of BTC. In other words, it answers the question, ‘Out of all the cryptocurrencies combined, how much of their net value is value contributed by Bitcoin?’
What Affects BTC Dominance?
Bitcoin dominance has been around ever since the first altcoins appeared. It used to be almost 100%, as crypto traders in the early years had little faith or even interest in diversifying away from already highly-volatile BTC.
The following years changed all that — now, there are thousands of cryptoassets, of which Bitcoin is just one, albeit the largest by market capitalization (also known as market cap). Market cap refers to the (normally U.S. dollar) value of all the tokens of a cryptocurrency combined. This constantly changes as the supply changes and in-line with market dynamics.
Bitcoin dominance is shorthand for Bitcoin market cap dominance — how much of the total crypto market cap does the Bitcoin market cap contribute?
The ratio of Bitcoin to altcoins in terms of market cap depends on multiple factors:
- BTC price performance
- altcoin price performance
- the proliferation of altcoins in general
- supply dynamics
No single phenomenon completely guides Bitcoin dominance, and traders wishing to use it to inform trading decisions need to be aware that the interplay of factors behind that dominance is complex and constantly changing.
The Relationship Between BTC Dominance and Market Cap
In short, anything that affects the market cap of Bitcoin and altcoins can impact dominance. The main relationship to bear in mind, however, is Bitcoin market cap versus altcoins market cap.
This itself is not as straightforward as it seems; “Bitcoin market cap goes up, altcoin market cap goes down” and vice versa does not tell traders the whole story. For example, the more altcoins enter the market, the more diluted Bitcoin’s market cap share can become, even if BTC price performance remains stable.
In notoriously volatile and unpredictable crypto markets, investment “fads” can also dramatically increase the market cap of a specific token very quickly, resulting in a rearrangement of market cap dominance which can be dramatic but also very short lived.
A third consideration comes from crypto market cycles. In bear markets, altcoins typically lose value faster than Bitcoin, while during the recovery, the opposite can be true.
There is no strict formula for understanding the relationship between the Bitcoin market cap and altcoin market cap — the two are in constant flux.
How to Trade Using BTC Dominance
Given the complexity of market cap ratio, it is safe to say that using it to trade involves a lot of potential pitfalls — room for losses, liquidations or worse.
Nonetheless, dominance behavior is important to bear in mind as part of an overall Bitcoin or crypto trading strategy.
There are two ways of trading Bitcoin and altcoins using dominance that are of particular interest to TabTrader users.
Use BTC Dominance to Determine the Strongest Trend
Looking at the ratio of Bitcoin dominance to altcoin dominance, traders can see which market cap share is increasing or decreasing more quickly to inform buy and sell decisions.
If the Bitcoin market cap is increasing faster than altcoins, for example, it would pay to increase BTC exposure. The opposite also stands, as does the reverse in market downtrends. There is a nuance, however — market cap share can be increasing or decreasing independently of price action.
As such, there are multiple considerations for traders computing both of these market signals when it comes to whether to buy or sell Bitcoin or altcoins.
| Bitcoin dominance ratio | Bitcoin price | Buy or sell? |
| Dominance ratio increasing | BTC price in uptrend | Increase Bitcoin exposure |
| Dominance ratio increasing | BTC price in downtrend | Reduce altcoin exposure |
| Dominance ratio decreasing | BTC price in uptrend | Increase altcoin exposure |
| Dominance ratio decreasing | BTC price in downtrend | Decrease Bitcoin exposure |
Use BTC Dominance to Determine Extreme High and Low Readings
There are thousands of altcoins to trade in 2022, but that does not mean that Bitcoin market cap dominance has decreased in a straight line since they first appeared.
Thanks to crypto market volatility and the factors listed above, the Bitcoin to altcoin market cap ratio has fluctuated up and down through the years and continues to do so.
The extreme highs and lows of this macro trend can also be a useful tool for crypto traders.
This involves a game of probabilities — historically, for example, BTC market cap dominance has not fallen below 35%. As such, traders could argue that this level presents a line in the sand, and that risk:reward ratio would be optimal should that level reappear.
Market psychology has a role to play here — if altcoins have been in an uptrend and hype is hitting a peak, it is safe to bet on a trend reversal incoming. This can be taken in tandem with other classic trading strategies with an emphasis on market cycles, notably the Wyckoff Method, which you can find out about in the accompanying TabTrader Academy article here.
Using extreme highs and lows, the following potential trading signals result:
| Bitcoin dominance ratio | Bitcoin price | Buy or sell? |
| Ratio at all-time high | BTC price in uptrend | Reduce Bitcoin exposure |
| Ratio at all-time high | BTC price in downtrend | Increase altcoin exposure |
| Ratio at all-time low | BTC price in uptrend | Reduce Bitcoin exposure |
| Ratio at all-time low | BTC price in downtrend | Increase altcoin exposure |
Is BTC Dominance a Reliable Indicator in Crypto Trading?
As mentioned previously in this article, the Bitcoin dominance versus altcoin dominance looks simple on the surface, but in fact depends on a complex web of interconnected phenomena.
As such, using the simple X:Y ratio is extremely hit-and-miss when it comes to crypto trading and will not yield reliable signals.
Anything can happen in crypto, and it is traders’ task to take into account as many tried-and-tested methods as possible to inform their strategies and minimize risk. Nonetheless, there is a place for market cap dominance in Bitcoin and altcoin trading, even as the number of altcoins trends higher and higher.
Conclusion
Bitcoin dominance is an indicator which is constantly changing and evolving in response to a wide range of crypto market triggers.
To use it correctly, traders need to factor in every aspect of what is going on “under the hood” in the relationship between Bitcoin and altcoins. They also need to be prepared for surprises which may turn a dominance trend on its head in a moment.
TabTrader has the tools crypto traders need to help — instant access to exchange accounts “on the go” in one place means that there is never a need to miss a trading opportunity or the chance to respond to sudden volatility.
Download the TabTrader app for iOS, Android and Web here.
The TabTrader Academy is meanwhile here to help navigate the complex world of crypto trading. Whether you’re a beginner or a pro, TabTrader has the tools and knowledge to make trading with Bitcoin dominance and other indicators faster and easier.
