Explained: Bitcoin Dominance and how you can use it to make better trades

Bitcoin Dominance is an important metric. It’s something that a lot of seasoned traders follow pretty closely. As a tool, it can give you a sense of how the crypto space is performing and where it is headed.

But what is Bitcoin Dominance? Well, it is basically Bitcoin’s share out of the total market capitalisation of all cryptocurrencies. Bitcoin Dominance tells you whether the altcoins are performing better, worse, or similar to Bitcoin. It is calculated by dividing the market capitalisation of Bitcoin by the total market capitalisation of all cryptocurrencies.

For example, the present Bitcoin Dominance can be calculated as follows:

Since Bitcoin is the first cryptocurrency to come into existence, its dominance has always been the highest. Most other coins tend to follow the movement of Bitcoin in response to key developments across the globe, which is why the overall crypto market cap usually mirrors the movements of Bitcoin.

How can you trade better using Bitcoin Dominance?

Knowing the meaning of Bitcoin dominance is good, but knowing what it indicates will help you make better trades. Historically, Bitcoin Dominance has been a good indicator of where the market is and where it is heading.

Since Bitcoin is the oldest and most dominant cryptocurrency, it tends to absorb market information faster. It also reacts much quicker than the altcoins, triggering a change in Bitcoin Dominance without any significant altcoin price movement. Therefore, if the investors are quick enough to spot these movements in Bitcoin Dominance, it can help make them smart and profit trades.

CoinTelegraph has highlighted four buy and sell signals to look out for based on Bitcoin Dominance:

Case 1: Bitcoin Dominance Reduces, but Bitcoin Price Rises:

When the Bitcoin dominance drops but a rise in Bitcoin price is observed, it means that altcoins are performing better than Bitcoin in a bullish market. This is a signal to buy altcoins and may also indicate that Bitcoin could pick up some steam soon.

Case 2: Bitcoin Dominance Reduces and Bitcoin Price Falls:

When the Bitcoin Dominance reduces with falling Bitcoin prices, it signals an overall bearish market, and all cryptocurrencies are likely to fall. This is a cue that investors should cash out or buy the BTC dip when the prices are low enough.

Case 3: Bitcoin Dominance Increases and Bitcoin Price Rises:

When the Bitcoin Dominance increases with a rise in Bitcoin price, it means that Bitcoin is performing better than the altcoins. This indicates a positive market sentiment for Bitcoin and signals investors to buy.

Case 4: Bitcoin Dominance Increases, but Bitcoin Price Falls:

When Bitcoin Dominance increases with Bitcoin price reductions, it means that altcoins are outperforming Bitcoin, and the market could soon become bearish for the altcoins. At this time, investors should cash out on altcoins and hold on to Bitcoin.

Can you rely solely on Bitcoin Dominance?

Investors must note that the Fear of Missing Out (FOMO) sometimes causes people to make impulsive trades in an attempt to make a quick buck. On the other hand, some investors begin panic-selling at the slightest doubt of a market downturn. Such reactions may also cause a short-term movement in the Bitcoin prices and its dominance.

Some analysts have also pointed out that Bitcoin Dominance does not account for all the BTC that has been lost due to forgotten private keys, dead wallets, or hacks. They also argue that Bitcoin has deep amounts of liquidity, which can again cause its dominance to be artificially inflated.

Therefore, it is always a good idea to look at other technical and fundamental indicators and use them in conjunction with Bitcoin Dominance. This will help you make informed decisions and minimise the risk of going wrong.