Until now, Bitcoin has remained the leader among the hundreds of thousands of existing and available crypto assets on the market. As a result, an indicator was born that was able to measure the level of dominance of Bitcoin in the crypto market against other types of crypto (for example, altcoins), namely the Bitcoin dominance indicator.
Basically, BTC dominance or Bitcoin dominance is a term used in the crypto asset market to measure how much of the market capitalization is controlled by Bitcoin (BTC) in comparison to all other existing crypto assets. In simple terms, BTC dominance is the percentage of the total crypto market value owned by Bitcoin.
BTC dominance itself is important because it provides insight into how Bitcoin is positioned as the main digital currency and its level of dominance among thousands of other cryptocurrencies. In this case, BTC dominance can reflect market sentiment and investor interest in Bitcoin.
So, to better understand what BTC dominance is, how to calculate it, the factors that cause it to rise and fall, and its drawbacks, see the following review.
What Is BTC Dominance?
In general, BTC dominance is an important indicator in the crypto market, as it can provide insight into how Bitcoin is influencing the market as a whole. Being the first crypto asset created and having the largest market capitalization, Bitcoin price movements often have a significant impact on all crypto markets.
For example, when BTC dominance increases, it means that Bitcoin is becoming more dominant in comparison to other crypto assets. This might indicate that investors are seeking protection or safe-haven value amidst market volatility.
However, on the contrary, if BTC dominance has decreased, this can indicate that there is increased interest in alternative crypto assets, which are often referred to as altcoins. During periods like these, other crypto assets are likely to experience faster growth in value than Bitcoin.
How is BTC Dominance Measured?
After knowing what BTC dominance is, it is also important to know how BTC dominance is measured. Basically, measuring or calculating Bitcoin dominance can be done by dividing the Bitcoin market cap (BTC market cap) by the total crypto market cap (total cryptocurrency market cap) as a whole.
The market cap refers to the total value of a cryptocurrency, which is determined by multiplying the total number of coins or tokens in circulation by the current market price. In summary, BTC dominance is a measure of Bitcoin’s market share when compared to all other crypto assets combined.
The following is a formula for calculating or measuring BTC dominance, namely:
BTC dominance Ratio = BTC Market Cap : Total Cryptocurrency Market Cap
Factors Causing BTC Dominance Can Change
So, now you know how to calculate BTC dominance. Furthermore, you also need to understand that BTC dominance can change. This, of course, cannot be separated from several factors. At least, there are two factors that can affect the rise and fall of BTC dominance, including
1.Many New Crypto Coin Releases
When many new crypto assets are introduced to the market, it can impact BTC’s dominance. The reason is, when there are many new altcoins launched, the overall market capitalization of the crypto market will increase because the number of existing assets increases. In this case, if the new altcoin’s market capitalization growth is faster than Bitcoins, it could cause BTC dominance to decrease.
It should be noted that not all new altcoins have strong fundamentals or large adoption, so their impact on BTC dominance may vary. Some new altcoins are known to be rapidly losing value, while others may experience significant growth.
2. Issues Using New Crypto Coins
Furthermore, when there are important issues or use cases involving certain altcoin crypto tokens, that too could have an impact on BTC dominance. If an altcoin project attracts great attention from the public or gains mass adoption in a real-world use case, then its market cap can increase quickly.
However, if there are significant security, fraud, or technical issues involving an altcoin project, it can lead to a decrease in the value of that altcoin and positively affect BTC dominance. The reason is, investors tend to switch back to Bitcoin as a more established and secure asset.
The use of BTC Dominance
Do you understand what the factors are that cause the rise and fall of Bitcoin’s dominance? It’s important for you to know what the uses of BTC dominance are. Basically, there are several uses for BTC dominance as an indicator, especially for investors, including the following:
1. Determine the Alt Season
BTC dominance is closely related to altcoins because they are like two sides of a coin. In this case, if BTC dominance is high, it means that investors prefer Bitcoin as their crypto asset choice and leave altcoins.
However, there are periods when altcoins are the prima donna, and this makes them dominate the crypto market capitalization, or what are known as “altseasons”. This condition is also an opportunity for investors to explore investment opportunities in altcoins.
During altseasons, investors usually tend to move their portfolios from Bitcoin to altcoins. Under these conditions, altcoin performance will far outperform bitcoin performance. If you want to take advantage of the momentum of this altseason, then a sign of an altseason taking place is when the BTC dominance index is strengthening, but the Bitcoin price trend is actually decreasing.
2. Price Trends
Another use of the BTC dominance indicator for investors is to assist them in making investment decisions. The reason is, BTC dominance is able to provide signals for selling and buying. In this case, investors only need to understand the trend comparison between the Bitcoin dominance index and the Bitcoin price trend.
Disadvantages of BTC Dominance
After understanding the uses of BTC dominance, you also need to know what the drawbacks of BTC dominance are. Even though it has a number of uses, BTC dominance is actually inseparable from several drawbacks. Here are some of the drawbacks that need to be known, including:
1. Not considering stablecoin growth
There are times when BTC dominance dwindles as investors move their funds into stablecoins in a big way. Even though stablecoins are actually included in the altcoin type, there is no hope that the token value will change. Therefore, in order to see the relationship between Bitcoin and speculative altcoins, it is best to calculate BTC dominance without involving stablecoins.
2. Does not count scam projects
The total market cap will be affected as each new token is listed on the crypto market. In fact, a number of these new tokens were created only to practice scams, rugpulls, or pump and dump. Even so, the presence of these new tokens remains a calculation and can have an impact on the percentage of Bitcoin dominance.
3. Not counting Bitcoins that have been lost
Another drawback is that the BTC dominance indicator does not count lost Bitcoins. Keep in mind that until now, it is not known exactly how many Bitcoins are stuck in wallet addresses that cannot be withdrawn. However, many suspect that at least 20% of the Bitcoin supply has been irretrievably lost.
That was the discussion about BTC Dominance starting from the meaning, factors to disadvantages, you can also read a collection of other interesting articles at INDODAX Academy.
Conclusion
In conclusion, an understanding of BTC dominance has many benefits for crypto market participants in monitoring the market and making wiser investment decisions.
Therefore, in order to understand BTC dominance effectively, market participants need to regularly track and analyze crypto market data and use various other indicators to get a more comprehensive picture of market dynamics.
Not only that, but for investors, it is also important to always be careful when investing in crypto and always do thorough research before making an investment decision.
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