In any investment market, the dominance of a particular asset depends mostly on its market capitalisation. In the case of crypto coins, the market cap is calculated by multiplying the current price of a coin by the total coins in circulation at a specific point in time.
Bitcoin has dominated the crypto market since it started trading in 2019. This market situation is called Bitcoin dominance.
Understanding Bitcoin dominance
Initially, Bitcoin’s dominance was close to 100% when it was among the few players in the crypto market. However, with the rise of altcoins, its market cap dropped significantly. The credit for this situation goes to Ethereum and the ERC-20 token standard.
Owing to the volatile crypto market, the rise and fall in the price of an asset is a daily affair. However, if the value of all other cryptocurrencies falls at a similar rate to that of Bitcoins, its dominance will not fall.
Let’s take an example for a better understanding.
Suppose the current price of one Bitcoin is $35,000 and that of one Ethereum is $1,900. Their total market supply is 10 million and 100 million, respectively. So the market cap in this scenario for Bitcoin is $(35,000 X 10 million) = $350 billion and for Ethereum is $(1,900 X 100 million) = $190 billion.
Due to market volatility, the price of Bitcoin falls to $34,000 and Ethereum falls to $900. Their respective market caps will be $(34,000 X 10 million) = $340 billion and $(900 X 100million) = 90 billion.
As both cryptocurrency prices fell at the same rate, Bitcoin’s market cap still dominates.
However, keep in mind that the total supply of Bitcoin is fixed at 21 billion. When all blocks are mined, their price will be the ultimate factor controlling their market cap.
If you are an investor, you should keep a note of certain things. A company’s market cap may give you a good idea about its size and performance. But, it does not represent money flow. You may find it confusing as market cap calculation depends on the asset price. Furthermore, a small variation in price is enough to make a noticeable difference in the market cap.
Other factors affecting Bitcoin dominance
Apart from the price of Bitcoins, other factors affect its market cap. They are:
- Hard forks and pre-mined coins
The pre-mined coins and hard forks on the Bitcoin network unnaturally increase the supply and cause the market cap to rise. Another reason you should never consider a crypto’s market cap as its real value.
- Altcoin fluctuations
Bitcoin dominance also depends on the fluctuation of the altcoin value. Most altcoins have a fixed supply, and if their investment increases, Bitcoin’s market dominance will fall.
How to take advantage of Bitcoin dominance
It would help if you took the time to understand Bitcoin dominance to learn how to take advantage of it. You can analyse the market trends and make profitable decisions accordingly.
Calculating the Bitcoin dominance ratio will help you frame your investment strategy. After that, you must check Bitcoin’s price trends for a particular time frame. You can then do the following:
- If the price of Bitcoin rises and the dominance ratio is high, you can buy Bitcoins.
- Similarly, if the dominance ratio is high, but the Bitcoin price is falling, you can sell altcoins.
- If the Bitcoin dominance ratio is down but the price rises, it is time to buy altcoins.
- If both the ratio and price are down, it is time to sell Bitcoins.
There is another strategy in which you can trade the extreme high and low readings. For this method, you need to analyse the historical data of both the dominance index and the price trend of Bitcoin. Based on those facts, you can do the following:
- If the dominance ratio is at a historical high and the Bitcoin price is rising, you can sell Bitcoins.
- You can buy altcoins if the Bitcoin price is falling and the dominance ratio is at a historic high.
- You can sell altcoins if the dominance ratio is at a historic low and the Bitcoin price rises.
- If the Bitcoin price is falling while the dominance ratio is at a historic low, you can buy Bitcoins.
Note – The abovementioned strategies are hypotheses and should not be considered foolproof investments.
The crypto market is highly volatile, and you must change your investment method frequently to keep your transactions profitable. Bitcoin dominance may help you predict market trends, but it can never replace a well-planned investment strategy. Always conduct thorough research and consult with experts before taking any major step.
