Yesterday during the day, a sound alert on our terminals: the price of Bitcoin briefly stood at $23,240 on Coinbase. And among other metrics sending a bullish signal, thebitcoin dominance index. An index that helps determine whether Bitcoin trading offers stronger trends compared to the rest of altcoins. An index that, precisely, has risen above its July 2022 levels in the last few days, a crucial moment in the hard crypto winter we are following. We find out what this could mean in terms of purchases.
This article is for you, whether you are trading the BTC/USDT pair or investing using the DCA method.
The dominance of Bitcoin: an index often overlooked by traders and investors
Bitcoin dominance is known by various names in blockchain analytics commentary: “dominance index”, “dominance ratio”, “BTC dominance”. Some words for the same metric. Bitcoin dominance is simply the ratio of BTC market capitalization to total capitalization of all cryptocurrencies.
Logic is involved the nature of BTC as a currency or store of value. In fact, one of the main distinguishing characteristics of bitcoin from altcoins is that it looks fundamental safe investment (like gold). It is the opposite for altcoins, which are considered much more speculative in nature. It makes sense, that the latter do not have the same fundamentals as BTC and are even more volatile.
During the last bullrun, Bitcoin’s dominance dropped significantly, from 63% in January 2021 to just 42% in May. The latter continued to decline and found its bottom around 40% in December 2021. Despite three rebounds, it failed to make significant progress and reached a local high of 48.45% in June 2022. Since then, the indicator has always been below 40%. … before reaching 44.3% on January 21, the highest level in six months.
Let’s start by putting this indicator in the more global context of the markets. You know that there is shape and direction Total crypto market capitalization closely follows Bitcoin. This is partly due to Bitcoin’s influence on the entire crypto market as it is the first, largest and most recognized cryptocurrency.
As investors or traders, let’s take it for granted that most people rarely venture into the field of trading projects outside the top 10, which do not have the same fundamentals as BTC and ETH. Therefore, they may believe that Bitcoin is the only cryptocurrency that deserves to be actively traded like stocks and Forex.
Therefore, if a desire to buy crypto, Bitcoin, and the broader crypto market tend to rise, pushing up both market caps. If therisk appetite had to hit the market again, most cryptocurrencies would liquidate, reducing the total market capitalization. A (slightly) reductive mechanism that helps us always take the pulse of the market.
Buy or wait? Possible strategies given the rise of Bitcoin dominance
As we sketched above, the Bitcoin dominance index has fluctuated greatly in favor of various bullish and bearish cycles. Between 2018 and the end of 2022, he navigated between a lower limit at 35% and the ceiling 74%. An upper limit that will be difficult to repeat again, because the altcoin market is growing at a faster rate than the adoption of Bitcoin.
Strategy 1 – Trading BTC Dominance Index Turning Points
Some traders’ strategy is to trade up or down when the index hits a high or low. When the ratio reaches a very high level, the markets are more favorable for a reversal so that the ratio falls. At the other end of the spectrum, a low value near its low indicates that Bitcoin is making a strong comeback.
Here again, the explanation is essentially psychological. Investors assess the value of a cryptocurrency based on other cryptocurrencies. And Bitcoin systematically analyzes BTC/ETH parity… In short, if investment has been flowing into altcoins for some time, it is assumed that the potential for Bitcoin appreciation and revaluation is greater.
Strategy 2 – Identify the underlying market trend through the BTC dominance index
We have tried to summarize in the table below how traders reason to decide which markets to target when BTC dominance starts to break through historical lows as it did with the key 44% threshold.
BTC Dominance Index
|The bitcoin trend|
|Ratio at a historic high||Bitcoin in increasing trend||Sell bitcoin|
|Ratio at a historic high||Bitcoin going down||Buy altcoins|
|Ratio at historic low||Bitcoin in increasing trend||Sell altcoins|
|Ratio at historic low||Bitcoin going down||Buy bitcoins|
From experience, Bitcoin dominance rarely reaches these historic highs and lows. However, when the ratio breaks through key intermediate levels, it may provide good trading opportunities. As always, this is not investment advice or a recommendation to buy Bitcoin. DYOR!
Buy or wait? Watch out for the “bull trap” weekend
Moreover, if there is one thing that crypto trading has taught us, it is that the weekend, and especially the 3-day weekend, systematically places bull traps (“bull traps”). It’s up to you to judge by the rectangles in light blue in the graph below: from last summer, the 4 biggest declines in BTC was, every time before bullish pressure on Friday.
The simple explanation is behavioral, and ultimately quite logical. First of all because the biggest market makers end their week and avoid holding jobs over the weekendso that they are not subject to the risk ofovernight. Then because the big investors from traditional finance imitate them, closing their positions on Friday afternoon.
The IS liquidity reductionsand this makes the prices more sensitive to unusual fluctuations. So a high volume of orders can push the price from one extreme to the other. This weekend is no exception, with BTC reaching at more than 8% above the closing price on Friday evening and even crossing the $23,000 mark.
Sources: ByBit, Cryptoslate
So let’s keep in mind that if the spot prices of Bitcoin and Ether are difficult to manipulate by a small group of individuals during the week, this is not necessarily the case on Saturday and Sunday.
This article does not represent investment advice in any way. The information provided here should not be used as a basis for making financial decisions. Investing in cryptocurrency involves risk and can result in significant losses. You should only invest what you can afford to lose and do your own research before making any investment decision.