🔥 Why Bitcoin Dominance Is Important: Deep Dive Analysis & Math

1 июн. 2022 г.

In today's analysis I want to dive deeper in why Bitcoin Dominance (BTC.D) is important and why you should add this tool to your trading strategies. At the end I dive deeper into the mathematics behind BTC.D and how you can use it to calculate values of future alts. Give it a read!

What is it?
BTC.D is simply put the total market cap of BTC divided by the total market cap of crypto.

Bitcoin cap / (Bitcoin cap + Altcoin cap) = BTC.D%

In other words, for ever dollar market cap, how much of that dollar is invested in Bitcoin.

Why is it important?
The BTC.D is important because it tells investors which part of the market is stronger. In an uptrend, Bitcoin is stronger. In a downtrend, alts are stronger.

If you look back on the chart you can see that during the heights of the crypto bull-cycles in 2017 and 2021, the BTC.D was in a free-fall. Everyone was selling their Bitcoins and putting their gains into alts, leading to the classic alt-seasons.

On the other side, if BTC.D is on the rise it almost always indicates that the market is risk-averse and prefers the 'stability' of Bitcoin instead of alts. Still, we can divide a rising BTC.D in two categories.
1) Bitcoin is going on a solo rally and alts are left behind. See 2019 BTC rally for an example.
2) The market is selling off. Alts are always riskier that BTC, therefore traders convert their alts into Bitcoin in order to have a lower potential downside. An example is the current bear market. Bitcoin lost around 60% value since November-21, where most alts have lost between 90% to 95% of their values.
In my view, we're just at the start of the BTC.D "bull-run". I think we're going to see a move towards 55%-60%, which corresponds with the top dotted resistance line.

Why your alts are dumping harder than Bitcoin.
With the knowledge that we just gained we're going to make some easy step-by-step calculations. Numbers are rounded for better readability and understanding.

What we need:
- Total market cap: 1,300,000,000,000 (1,3T)
- Bitcoin Dominance: 46,75%
- Total amount of BTC in circulation: 19 million (19M)

Knowing this we can calculate the $-value of 1 BTC.
(1,3T x 46,75%) / 19M = ~32,000 per BTC, which is around the current price.

Now we're going to make some assumptions on future prices to see how much your alts can bleed during bear-markets. The values below are just for informational purposes, so bear with me.

BTC now: $32,000
BTC +1 year: $35,000
BTC.D now: 46,75%
BTC.D +1 year: 60%
BTC supply now: 19 million
BTC supply +1 year: 19.3 million (+900 BTC are mined per day)

Knowing the above, we can calculate the total market cap of alts now and +1 year in the future.

Total altcoin market cap now: 1,3T x (100%-46,75%) = 692,25B

+1 year in the future:
- BTC market cap: 35,000 x 19,3M = 675,5B
- Total crypto market cap: 675,5B / 60% = 1,126T
Total altcoin market cap: 1,126T - 675,5B = ~450B

Assuming the above, we can see that the total market cap in altcoins has decreased by around 35%, even when Bitcoin has seen an almost 10% increase during the same time period. In other words: your alts lost 35% value in a year, while BTC gained almost 10%. Be aware that the -35% is an average over all alts; some will perform better and others worse

This all has to do with Bitcoin Dominance rising and investors reducing their risk.

Thanks for reading!