What is bitcoin dominance and why is it so important to keep an eye on this indicator?

Bitcoin dominance is a key indicator that attracts the attention of many investors and cryptocurrency market participants. This indicator represents the share of bitcoin's market capitalization relative to the total capitalization of all cryptocurrencies. Understanding bitcoin dominance is important for investors and traders, as it can provide insight into how bitcoin affects the entire cryptocurrency market and what trends can be expected in the future. In this article, we will look at why it is important to keep an eye on bitcoin dominance and how this indicator can improve your trading and investing performance.

What is bitcoin dominance BTC?

Bitcoin Dominance, denoted on charts as BTC.D (Bitcoin Dominance) is an index that measures the share of bitcoin's market capitalization relative to the total market capitalization of all cryptocurrencies.The index is expressed as a percentage.

The history of the term is linked to the development of the cryptocurrency market and the rise of alternative cryptocurrencies called altcoins. At the beginning of the cryptocurrency era, bitcoin was the only cryptocurrency and its dominance accounted for 100% of the market capitalization of cryptocurrencies. However, over time, new cryptocurrencies such as Ethereum, Ripple, Litecoin and many others have emerged.

With the emergence of altcoins, the market began to diversify, and investors began to pay attention not only to bitcoin, but also to other cryptocurrencies. This led to a decrease in the share of bitcoin in the total market capitalization. To track this share, the BTC.D indicator was introduced.

Why is BTC dominance important?

Bitcoin's dominance is important for several reasons:

• Reflects the difference in the cryptocurrency community's interest in bitcoin and altcoins.
• Allows investors and traders to assess how stable bitcoin is holding its position in the market. It also allows for a localized assessment of who is stronger and who is weaker and how much stronger or weaker BTC is now relative to altcoins. 
• Helps to forecast trends in the cryptocurrency market and assess whether altcoins are now interesting, competitive and promising for purchases. With the help of domination it is impossible to determine which altcoins are promising.

It is important to understand that bitcoin dominance is only one of many factors affecting the dynamics of the cryptocurrency market, and it should be considered in synchronization with other tools and chart analysis. . Still, this indicator remains an important tool for analyzing and making decisions in the world of cryptocurrencies.

What is influencing bitcoin's dominance?

Let's take a look at what factors influence bitcoin's dominance and shape this important indicator in the cryptocurrency market.

Bitcoin price

Bitcoin price plays a key role in determining BTC dominance and here's why:

1. Capitalization leadership. Bitcoin, as the first and most well-known cryptocurrency, has the highest market capitalization among all cryptocurrencies. When the price of bitcoin increases, its market capitalization also increases, leading to an increase in bitcoin's share of the total cryptocurrency market capitalization.
2. Psychological effect. The price of bitcoin often becomes news, which attracts the attention of a mass audience and increases interest in cryptocurrencies in general. This can also help to increase bitcoin's market share.
3. Perception of stability. Bitcoin is often seen as a more stable cryptocurrency compared to many alternative cryptocurrencies. Therefore, when the price of bitcoin rises, investors may prefer it to avoid higher volatility, which can help increase its dominance.
4. Investment strategies. The high price of bitcoin can influence investment strategies such as diversifying the assets in a portfolio. Investors can increase their exposure to bitcoin to take advantage of the rising price, which also increases its market share.
5. Investment Interest. A high bitcoin price may attract more investors and traders to the cryptocurrency market. This may cause an increase in demand for bitcoin and its share of market capitalization.

It is important to note that the bitcoin price is not the only factor affecting its dominance. This indicator is also influenced by other factors such as technical innovations, regulatory changes and the overall dynamics of the cryptocurrency market.

Altcoin price

Altcoin prices have a significant impact on bitcoin dominance and overall cryptocurrency market dynamics. Here are a few key points that explain how the price of altcoin affects the cryptocurrency market:

1. Competing with bitcoin. The price of altcoins often competes with the price of bitcoin for investors' attention and investment. If the price of altcoins rises faster than the price of bitcoin, investors may lean towards altcoins, which may reduce bitcoin's share of market capitalization.
2. Alternative investments. A rise in the price of altcoins could attract investors looking for alternative investment opportunities. This could mean that investors will exit bitcoin in favor of altcoins, which also affects bitcoin's dominance.
3. Innovation and technological advancement. Some altcoins offer unique technological solutions and advantages that may attract the attention of investors and users. Increased interest in these innovations may contribute to an increase in the price of altcoins.
4. Volatility. Altcoin prices are often more volatile than bitcoin prices. This can provide traders and speculators with more opportunities to profitably trade altcoins, which also affects their prices and dominance.
5. Reaction to news and events. Events such as announcements of new projects, changes in legislation or major investments can significantly affect altcoin prices. Investors follow and react to such news.

Why is it important to keep an eye on bitcoin's dominance?

This indicator represents bitcoin's important role in the digital ecosystem and has a direct impact on the dynamics of the cryptocurrency market. Therefore, monitoring bitcoin dominance is an integral part of analyzing the market and making investment decisions.The dominance index, combined with the price of bitcoin itself, can tell you whether it is the right time to invest in altcoins. This allows you to more accurately manage your risk and diversify your portfolio. Here's how it works:

1. BTC dominance up + BTC price up = altcoin price down (dump).
2. BTC dominance up + BTC price down = altcoin price down (dump). 
3. BTC dominance up + BTC sideways movement = sideways movement in altcoin price, often altcoins are a bit weaker at times like this.
4. BTC dominance down + BTC price up = altcoin price up (pamp). 
5. BTC dominance down + BTC price down = sideways altcoin price movement, often altcoins follow BTC in such moments. Some may show localized strength.
6. BTC dominance down + BTC sideways movement = altcoin price up (pamp).

Index of dominance in other markets

Dominance indices can also be used to analyze sectors in the stock market. For example, in the S&P 500 Index, sectors such as technology, health care, energy and others can be identified and their share in the total market capitalization of the index can be measured. This allows investors to assess which sectors are most important and which can influence overall market dynamics.

Can bitcoin's dominance index be analyzed?

Yes, the bitcoin dominance chart can be analyzed, which helps traders and investors. The dominance chart helps us to correctly identify the current trends in the market in order to work more efficiently, because we have to adjust to the market, not the market to us. A dominance chart can provide a lot of benefits both short-term and long-term. For example, a bitcoin dominance chart can indicate the weakness of altcoins against bitcoin, which tells us that the moment to buy has not yet come, and for traders it is a signal that downside positions on altcoins are a priority, and upside positions on bitcoin are a priority. Below is a practical example of analyzing the dominance chart.

Should we rely on the bitcoin dominance index for trading: the Cryptology.KEY team's opinion

The bitcoin dominance index is an important element when analyzing the cryptocurrencymarket. It is really important and carries a lot of useful and applicable information both short term and long term.

It can be analyzed and applied in your trading, because with the right analysis you can get a number of advantages, but you should not rely only on this index, because it will be useful only in synchronization with other tools and qualitative chart analysis.

 By the way, in our weekly market analysis we constantly analyze this index and give our conclusions - this is a qualitative example of applying dominance analysis in trading.

If you want to learn more about cryptocurrencies and get skills, experience and tools that you can immediately apply in the cryptocurrency market - sign up for trading courses at the CRYPTOLOGY trading school.