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September 21, 2020
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Is Bitcoin’s dominance a good indicator?

Bitcoin’s dominance is an indicator that shows how strong BTC’s market capitalization is compared to other cryptocurrencies.

The way in which Bitcoin dominance is calculated is quite simple, because it is enough to divide Bitcoin’s market capitalization – expressed in dollars – by the total market capitalization of all cryptocurrencies, including BTC itself.

For example: at this point, according to data published by CoinMarketCap, Bitcoin’s market capitalization is around 190 billion dollars. The total market capitalization of all cryptocurrencies is around US $ 334 billion. Therefore, 57% of this amount is referring to Bitcoin and that percentage is also the value of its dominance.

In addition, it is worth mentioning that the market capitalization is calculated by simply multiplying the dollar value of a certain token by the total number of those tokens that are in circulation. So, with almost 18.5 million BTC circulating at a price of just over $ 10,000 each, the result is around $ 190 million.

Therefore, the dominance of Bitcoin it is not fixed, varying over time. In early 2020, it was in the 70% range, but it has been falling over the months. This is due both to the increase in value in some altcoins, such as Ethereum, and to the addition of new cryptocurrencies that have already achieved significant market capitalization, such as Polkadot (DOT).

How to interpret the Bitcoin dominance indicator

A variation in this dominance can basically mean three things:

  • the price of BTC varied, as the offer is relatively constant,
  • altcoin prices have changed,
  • new altcoins with relevant market capitalizations were added.

With that in mind, it is difficult to determine a valid rule for interpreting any variations in these parameters. In other words, it is complicated to use Bitcoin dominance as a good indicator to analyze market trends.

However, under specific market conditions, it may provide some light, although it is not necessarily accurate but only vaguely probabilistic.

Can we take into account information from the past?

In the past, for example, it has happened several times that a rapid reduction in Bitcoin’s dominance due to an increase in the price of altcoins has been followed by a recovery from previous levels, either due to the increase in the price of Bitcoin, or due to the reduction in price altcoins.

This phenomenon, however, could basically have happened because of the formation and deflation of speculative mini bubbles in the altcoin market.

On the other hand, there are also records of other events that are somewhat atypical. In 2017, for example, Bitcoin’s dominance dropped from 85% to 38% in just four months. Shortly thereafter, it rose again to 62% and then plummeted to its lowest level ever – hitting less than 33% on January 15, 2018.

Since then it has never returned to 85%, mainly due to the arrival of numerous cryptocurrencies on the market, which were launched after February 28, 2017, the last day on which it was so high.

Thus, it is possible that Bitcoin’s dominance gives only a few indications in the short term because, even when its variations in the medium term are clear, the signs that we can derive from it may not have a single interpretation.

Source: Cryptonomist

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