Crypto Basics Crypto Knowledge

The Importance of Bitcoin Dominance and How it Works

Bitcoin is without a doubt the unquestionable cryptocurrency leader in terms of total crypto market share and global popularity. The Bitcoin Dominance indicator is a measurement of the total crypto market cap amount comprised of Bitcoin. In the cryptocurrency market, market capitalization refers to the total value of all coins that have been mined so far and is calculated by multiplying the number of coins in circulation by the current market price of a single coin.

The Bitcoin Dominance

The Bitcoin dominance measurement helps you understand if altcoins are in a downtrend or uptrend against BTC. In simple terms, if the BTC dominance increases, alts on the whole lose value against Bitcoin and vice versa. To determine the trend of BTC dominance you can use TradingView’s chart to view the index.

This suggests that in a Bitcoin dominance uptrend across the crypto market, usually occurring while in a bear market, you’ll want to be in Bitcoin and less in alts. Alternatively, in a crypto bull market the Bitcoin Dominance indicator is in a downtrend as these vibrant markets propel alt capitalization higher than Bitcoin. This is usually referred to as an altcoin season. So yes, it’s almost as easy as that to understand Bitcoin dominance, however there are of course a variety of implications on different time frames and this is just one useful tool in a trader’s toolkit.

Below you can see a chart of Bitcoin Dominance ratio and its correlation with market cycles. On the Bitcoin Dominance chart we see that whenever Bitcoin dominance decreases alt coins dominance increases:

How does it work?

As a general rule of thumb, the direction of the total crypto market will be directly affected by Bitcoin’s price regardless of other major crypto asset market dominance such as Ethereum (ETH), Ripple (XRP), Litecoin (LTC) and popular stablecoins. This is the case because Bitcoin’s share and recognition in the crypto market is by far the greatest, as BTC is the oldest and most respected cryptocurrency. It is important to know that an increasing price of Bitcoin has a positive effect on the entire crypto market, bringing in new investors in and, in turn, raising the total market capitalization.

So, in essence, Bitcoin’s market cap gathers momentum and liquidity, raising the Bitcoin Dominance index. However, by doing so, investors can begin to look for other digital assets to invest in as trading Bitcoin becomes more expensive, typically initiating the start of the alt season.

Let’s face it, trading any market can often be a difficult and risky endeavor. This is especially true for the crypto market. Day traders, swing traders and long-term investors need all the useful information and tools they can get. Glassnode, the crypto industry’s leading blockchain data and intelligence platform, equips investors and traders with the most comprehensive on-chain insights to help them make better investment and trading decisions.

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