The cryptocurrency market moves in somewhat predictable patterns, much like a choreographed dance where Bitcoin leads and everything else follows. And with this dance affecting every cryptocurrency, we are better off understanding it. Let’s break down how these movements work and what the Bitcoin dominance could mean for your trading.
What is Bitcoin Dominance?
First of all, what exactly is Bitcoin Dominance (BTC.D)? Well, it represents Bitcoin’s total market value compared to the entire cryptocurrency market’s value and is expressed as a percentage.
For example, if the total crypto market is worth $3 trillion and Bitcoin’s market cap is $1.8 trillion, then Bitcoin Dominance would be 60%.
How Bitcoin Dominance Affects the Market
We will explore the concept of Bitcoin Dominance and its impact on the cryptocurrency market. Specifically, we will examine three different scenarios: rising Bitcoin Dominance, peak Bitcoin Dominance, and falling Bitcoin Dominance.
In the first scenario, where Bitcoin Dominance rises from 60% to 70%, we see a distinct shift in market dynamics as investors move towards Bitcoin, which is often viewed as a safer asset. This shift causes an increase in Bitcoin’s price from $90,000 to $95,000. At the same time, as capital concentrates in Bitcoin, altcoins experience a decline, with their value dropping.
The second scenario occurs when Bitcoin Dominance stabilizes at 70%. Here, Bitcoin’s price levels off, remaining stable at around $95,000, suggesting a balance where new investments are not significantly altering its value. During this period, altcoins find a floor.
In the third scenario, as Bitcoin Dominance starts to decrease from 70% back to 60%, the market sees a redistribution of capital away from Bitcoin and towards altcoins. Although Bitcoin’s price still increases to $98,000, the growth rate slows. Concurrently, altcoins begin to rally.
Of course this isn’t certain to happen, and besides some outliers we can see this happening over and over again.
How Can Traders Practically Apply These Cycles?
Understanding these relationships could be interesting for making informed trading decisions. When Bitcoin Dominance begins to rise and Bitcoin’s price increases alongside it, it’s generally advisable to reduce positions in altcoins. For instance, if Bitcoin Dominance climbs while Bitcoin’s price jumps from $90,000 to $95,000, it may be a good strategy to consider selling altcoins rather than risking a potential drop lower.
The optimal time for trading altcoins often occurs after Bitcoin has demonstrated strength and then reached a point of stability. When Bitcoin’s price stabilizes at a new level, such as $95,000, and exhibits low volatility, it can indicate the potential beginning of an altcoin rally.
During periods of high Bitcoin Dominance, particularly between 65% and 70%, this pattern is especially relevant. This phase can signal a shift in market focus back to altcoins, presenting opportunities for significant gains in this segment.
High Bitcoin Dominance (65-70%):
Good time to:
Bitcoin → Hold/Take Profits
Altcoins → Start Accumulating
Low Bitcoin Dominance (50-60%):
Good time to:
Bitcoin → Accumulate
Altcoins → Take Profits
What are Some Reasons Bitcoin Dominance Rises?
In the section below, we discuss some reasons that contribute to Bitcoin dominance rising. We cannot predict the future with 100% certainty, but we can make assumptions based on historical data.
Market Fear Scenarios
During times of global uncertainty (like interest rate hikes or banking crises), Bitcoin Dominance typically follows this pattern:
Traditional Markets ↓
→ Fear Increases
→ BTC.D ↑ (60% → 70%)
→ Bitcoin Price: Initially ↓, then ↑
→ Altcoins ↓↓ (Sharper decline)
Interest Rate Impact: Rate Hikes
Immediate Market Response with the following market pattern:
- Bitcoin Dominance (BTC.D): Increases as an initial reaction.
First 24 hours:
- BTC.D: Rises from 60% to 65%
- Bitcoin: Decreases from $90,000 to $88,000
- Altcoins: Generally fall
After 1 week:
- BTC.D: Climbs further from 65% to 68%
- Bitcoin: Recovers to $95,000
- Altcoins: Typically see a slight decrease
Interest Rate Impact: Rate Cuts
When the Federal Reserve Cuts Rates we see the following market pattern:
- Bitcoin Dominance ↓
First 24 hours:
- BTC.D: Drops from 65% to 62%
- Bitcoin: Increases from $90,000 to $92,000
- Altcoins: Generally rise, with typical gains reflecting a modest increase in value
After 1 week:
- BTC.D: Further decreases to 58%
- Bitcoin: Rises to $95,000
- Altcoins: Continue to gain, as investors confidence grows stronger
Dollar Strength Correlation
Strong Dollar (DXY ↑):
- Bitcoin Dominance ↑
- Risk Assets ↓
Flow:
- DXY rises 1%
- BTC.D: Increases from 60% to 65%
- Bitcoin: Decreases from $90,000 to $89,000
- Altcoins: Typically drop, showing a decrease in risk appetite among investors
Weak Dollar (DXY ↓):
- Bitcoin Dominance ↓
- Risk Assets ↑
Flow:
- DXY falls 1%
- BTC.D: Decreases from 65% to 60%
- Bitcoin: Rises from $89,000 to $92,000
- Altcoins: Generally increase, benefiting from a weaker dollar and increased risk tolerance
Institutional Investment Impact
Even if large institutions increase Bitcoin exposure, as seen with the ETF news earlier this year:
- BTC.D: Increases from 60% to 65%
- Bitcoin: Price action becomes more stable, showing less volatility than usual
- Altcoins: Typically decrease in price, as funds are diverted to Bitcoin
Economic Growth Periods
When traditional markets are bullish and risk appetite is high(er):
- Traditional Markets: Rise, indicating a bullish sentiment
- Risk Appetite: Increases, leading investors to seek higher returns
- BTC.D: Decreases from 65% to 55%
- Bitcoin: Despite the decrease in dominance, the price rises from $90,000 to $95,000
- Altcoins: Experience significant gains, often from outpacing Bitcoin’s growth because investors want to speculate.
Conclusion
Now that we have walked you through some interesting scenarios that have happened all too often, we have to remember that crypto is correlated to macro events. With Bitcoin typically reacting first, followed by shifts in dominance, and finally altcoin movements. It is interesting to know that this cycle typically plays out over several months rather than small timeframes.
Also, while these patterns are common, they’re not guaranteed. Market conditions can change, and external factors can disrupt these cycles, as seen with the many strange reactions of the markets. However, understanding these relationships can give you more mental clarity in sometimes vague times.
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