Bitcoin Dominance Explained-How to Read Capital Rotation

Quick Answer

Dominance is how much of the total crypto market cap in the world that Bitcoin occupies. Bitcoin is the most valuable, most secure, and most decentralised cryptocurrency; it is a useful yardstick of how the general market is performing. Investors also view Bitcoin as a safer asset to put money on compared to other volatile coins; hence, markets tend to develop this ratio.

Major Takeaways

• Falling and rising dominance requires context 

• It is not just Bitcoin and altcoins that can alter the level of dominance.

• Stablecoins are a lesser-known agent of dominance change.

• Sentiment has a significant role to play in the dynamics of dominance

• During altseason, traders tend to favour altcoins over Bitcoin, thereby decreasing dominance. 

• In bear markets and macroeconomic instability, the properties of Bitcoin give it an advantage over other assets, increasing its dominance.

What Crypto Dominance Measures

Dominance looks at Bitcoin's share of the total Market Cap of various assets. To get the market cap of a specific coin or token, we multiply the price and the circulating supply. But do not assume that total market cap is all the coins in existence; rather, it is a combination of cryptocurrencies the platform in question deems important and wants to track.

How Bitcoin Dominance Is Calculated

BTC dominance is Bitcoin market cap / total crypto market cap × 100%. A $30 billion Bitcoin market cap and a $100 billion total market cap gives 30% dominance. 

Rising vs Falling Dominance: Reading Rotation

Dominance rises with relative Bitcoin growth against other altcoins. So either Bitcoin rises faster than the altcoins, or drops slower than them. 

The reverse holds when dominance falls: altcoins are gaining on Bitcoin, as we would see in the next section; this is known as altcoin season, where traders are moving cash from Bitcoin into other assets in hopes of a bigger gain. 

However, declining isn’t always bullish. Bitcoin might just be losing value faster than altcoins during broader market selloffs. Reading these situations correctly requires looking at the bigger picture always.

Dominance and Altcoin Season Claims

When platforms track Bitcoin performance against altcoins over 90 days, they get what is called a season index. If 75% of tracked assets perform better than Bitcoin, it is known as an altcoin season. Some markets use their top 100 valuable coins, while others use their top 50. 

Regardless of what is used in the calculation, altcoin season offers a view of the level of confidence the market has in assets other than Bitcoin. And it is a marker of relative performance. Not a reflection of what would continue to occur in the future.

Some tokens beating Bitcoin for a matter of time does not mean that investing in them would yield better gains. In unfavourable market conditions, because Bitcoin is easy to buy and sell, a change in trader sentiment could make people quickly switch to Bitcoin since it is more stable, thereby causing dominance to rise once again.

Where Dominance Misleads: Stablecoins and New Listings

It is not only Bitcoin and altcoins that move dominance. Stablecoins sit in the denominator of the calculation. Their price is fixed at one dollar, so a stablecoin's market cap changes only when supply changes. That means new issuance lowers Bitcoin's share even if the BTC price and altcoin prices have not moved.

The addition of another token to listing charts can also alter dominance. If a platform starts monitoring a token worth $20 million, a $1 billion total becomes $1.02 billion, and Bitcoin dominance, which is at 60%, falls to 58.8% without any change in Bitcoin price.

Wrapped Bitcoin is another example that could affect dominance. Wrapped Bitcoin is a token on another blockchain that represents Bitcoin. So one Bitcoin is held for each wrapped token issued, and the same value is represented twice. Providers could count the actual Bitcoin in the Bitcoin market cap and count the wrapped token again in the total, making the total market cap larger and dropping dominance. How providers handle wrapped tokens varies, so double-checking is needed.

Using XXKK Market Data to Track Dominance

To observe the relationship between Bitcoin and other cryptocurrencies, knowing the dominance meaning is not enough. XXKK Market Data offers a clear outlook on all signals; you can view the overall state of the market and get an outlook on investor sentiment

Conclusion

Dominance is considered to be important because it signifies quite a number of things, not just Bitcoin's share of the market. It can be used as a market direction indicator, to plan trading strategy, to check the strength of altcoins, and so on.

But it is not an absolute metric; its rise and fall should be judged with nuance. Checking other metrics helps to give a deeper insight into what is going on in the market. 

Open an XXKK account to track market-wide data.

Compare dominance shifts against volume on XXKK before rotating.

Rotate gradually and keep a core position you do not trade on sentiment. 

FAQs

What is Bitcoin dominance?

A ratio between Bitcoin and the overall cryptocurrency sector.

How is dominance calculated?

Dominance is obtained from the division of  Bitcoin market cap by the total crypto market cap, then describing that ratio as a percentage. 

What does rising dominance mean?

It means the Bitcoin market share has increased at that moment in time.

Does falling dominance mean altcoins will rise?

No. The only way to confirm is to check the actual value of altcoins and other market signals.