The Bitcoin Dominance Index shows exactly how much the entire cryptocurrency economy is dominated by Bitcoin. Market capitalization is the total value of all digital assets in circulation at any given time – so, it is the combined value of Bitcoin, Ethereum, Litecoin, and all other cryptocurrencies. The market capitalization of a single coin is determined by multiplying its price by its circulating supply. This determines the value of all available Bitcoin in the market.
Calculating the percentage of dominance Bitcoin has in relation to the whole cryptocurrency market is done by taking the total market capitalization of the entire market and dividing it by the market capitalization of Bitcoin. But how does Bitcoin dominance affect the market? The historical bitcoin dominance chart shows it as being about 90% of the total market cap up until 2016 before declining. The declining cycle shows Bitcoin had the lowest dominance in January 2018 at about 33%. There were numerous reports that “Bitcoin is Dead” around that time. As of this writing, Bitcoin dominance is up over 50% again, as we see the cycle has reverted.
So, what causes each cycle? Cycles in the past have had a common denominator being new investors lured by an altcoin’s self-professed market narrative – or “hype”. New tech captures investors’ attention and “fear of missing out” drives emotional buys of this altcoin or the next. At the peak of inflated expectations, the cycle reaches a point where it can go no further and investors start to dump the altcoin. Many do so and reinvest profits in Bitcoin. These cycles are not driven by fundamentals, but rather by hype and investor sentiment. When the music stops and investor capital is tapped out, the Bitcoin dominance cycle begins to revert.
It is important to realize how relatively easy it is to add a lot of market cap to the cryptocurrency index and make Bitcoin appear less dominant. An example from Jimmy Song demonstrates how deceiving the Bitcoin Dominance Index can be.
Suppose I make a new coin tomorrow called FoolCoin. I premine the whole thing (100,000,000 coins) and only make 10 coins available. Perhaps I create a marketing campaign and even get enough people to desire the coin that Poloniex lists it. I sell just 1 of the coins for $10. FoolCoin now has a $1 Billion market cap. The next coin, I sell for $11 and now FoolCoin has a $1.1 Billion market cap. If there’s enough demand, I eventually end up selling the other 8 coins for $20 each at which point, FoolCoin now has a $2 Billion market cap.
I’ve just added $2 Billion dollars to the cryptocurrency market cap and have reduced Bitcoin dominance by a few percentage points. But did I really take anything out of bitcoin other than perhaps a few hundred dollars worth?
The scenario I’ve laid out for FoolCoin doesn’t even assume the more sinister manipulation activities like wash trading, pump and dump, etc.
How to Profit from Bitcoin Dominance
When investor euphoria over one altcoin or another is widespread, one can benefit by lightening up on assets that are more expensive and aggressively buying the cheaper ones at the beginning of the cycle – not at the end. The same holds true for Bitcoin. During the peak of euphoria over altcoins, institutional capital enters the space and buys Bitcoin – not Bcash or TRON or ETH. It is a BTC ETF that will launch first – not a BCH one, of that you can be fairly confident. When Bitcoin starts getting cheaper its time to build up core, fundamentally strong positions, but knowing when to act is not easy.
British educationalist Harold Marks is known for describing two ways to profit from markets. One is to hold more of the assets that rise, and less of the ones that fall. The second is to adjust for cycles and try to have more risk exposure when markets rise and less when they fall. The key is to understand where we are in the cycle and determine the risks and rewards accordingly. Long-term cycles are driven by long-term fundamentals but result from the accumulative effects of the short-term cycles. Short-term cycles are driven by capital flow, investor structure, and market sentiment.
Given Bitcoin dominance is a repeating trend, all it takes for Bitcoin to rally is a catalyst like a news story, pending ETF being passed, notable adoption, etc. People will start buying Bitcoin and the price and dominance will rise. When people want to reinvest gains, they’ll buy other altcoins which will make Bitcoin dominance decrease again. So, one could profit with proper timing, by a) stocking up on Bitcoin when it is low, and b) selling at its peak to buy altcoins you believe will rally. (Selecting the right altcoin is a whole different animal that we’ll not get into!) When the altcoins rise, cash out or convert back to Bitcoin after making a sufficient amount of profit. Of course, one could just stock up on Bitcoin when low, and cash out when it is high – never buying altcoins at all – and buy more Bitcoin when the cycle repeats and Bitcoin is low again.
Making gains by following the fluctuation of Bitcoin dominance requires good timing. While knowing exactly WHEN this will happen requires a good deal of luck – knowing it WILL happen might give one an edge.
With Crypto Price Prediction Game you can guess whether cryptocurrencies like Bitcoin, BCash, Ether, Litecoin, DigitalCash or Monero prices will go up or down in the short term. The game results are recorded in cookies, so you can return to continue from where you stopped last time. Cryptocurrency prices are collected and aggregated from major exchanges.
Before making real investments…
see if you can beat the market.
Play right now!