One of the key indicators for modern cryptocurrency traders is the market capitalization of a particular digital asset. If you are interested in automated trading on cryptocurrency exchanges or aim to create a balanced investment portfolio, regularly tracking trading volumes and market capitalization of assets will be the right decision.

• What is Bitcoin Dominance?
• The Impact of Bitcoin Dominance on Other Cryptocurrencies
• Factors Contributing to Bitcoin Dominance in the Market
• Strategies for Minimizing Investment Risk
• Potential Drawbacks of the Bitcoin Dominance Indicator

What is Bitcoin Dominance?

Bitcoin Dominance is a popular technical indicator that emerged in 2017 and is widely used by major analytical platforms. Bitcoin Dominance represents the ratio of Bitcoin's market capitalization to the total market capitalization of all cryptocurrencies. The calculation includes the next 125 largest tokens (this number may vary depending on the specific indicator). The resulting value is multiplied by 100.

Bitcoin dominance decreases during periods of increased investor confidence in the blockchain industry and rises in market contraction conditions.

It is important to note that this indicator is not a source of trading signals. It allows for viewing price changes from a different perspective and identifying potential future changes based on available information. However, making conclusions solely based on Bitcoin dominance charts is not recommended.

The Impact of Bitcoin Dominance on Other Cryptocurrencies

Although the indicator itself does not have a direct impact, the market share occupied by the leading token of the blockchain industry often signals to investors what actions to take. When Bitcoin's share increases, Bitcoin network clones often follow. The performance of altcoins such as Litecoin, ZCash, and other networks similar to BTC can significantly increase due to investor interest.

On the other hand, the correlation between altcoins and Bitcoin is not always obvious. EVM-compatible platforms are theoretically expected to lose value when $BTC rises since Proof-of-Stake and Proof-of-Work networks represent radically different directions in the development of the blockchain sector in the global economy. In practice, EVM-compatible network cryptocurrencies often receive a growth boost during periods of increasing Bitcoin dominance.

Tracking altcoin and Bitcoin prices becomes especially intriguing during periods of increased volatility in this indicator. It allows for identifying correlations and connections within the industry that previously seemed impossible.

Factors Contributing to Bitcoin Dominance in the Market

The Bitcoin Dominance index is formed based on two metrics: the market capitalization of $BTC and the total market capitalization of the next 125 tokens. This calculation method is accepted in the blockchain industry. Factors influencing Bitcoin dominance in the cryptocurrency market are related to changes in market capitalization and cryptocurrency prices in general.

Factors Contributing to Bitcoin Dominance:

1. The level of cryptocurrency adoption in the global economy:

   • Acceleration of cryptocurrency integration with the increased use of $BTC and its analogs for enhancing anonymity and decentralization leads to an increase in the index.
   • Slowdown in cryptocurrency integration with the overall market contraction can also increase the index due to investors' desire to move capital to more stable assets.
   • Increased use of EVM-compatible and ERC-20 tokens lowers the index due to the growing popularity of Ethereum-compatible digital assets.

2. Economic uncertainty:

   • Lack of transparency in the blockchain industry: Many centralized exchanges exaggerate trading volumes and interest in cryptocurrency assets, distorting the evaluation of market capitalizations.
   • Inflationary mechanisms: The issuance of new tokens such as $XRP, $ETH, $XLM, $ZEC increases their circulation but does not always raise market capitalization.
   • Free-float in cryptocurrencies: A significant number of tokens are not considered in market capitalization calculations as they may be locked, staked, or otherwise not involved in market trading.

The impact of economic uncertainty:

• Lack of data on actual trading volumes.
• Incomplete data on the number of tokens in circulation.
• Lack of clear methods for evaluating token value, especially in the DeFi sector.

Data Discrepancies:

The Bitcoin dominance index may vary depending on the data source, such as Binance and Coinbase, or aggregators like CoinMarketCap. This affects the effectiveness of various financial tools, such as crypto robots on different platforms.

Strategies for Minimizing Investment Risk

Investors need to deeply understand the current market situation and balance their asset portfolios according to visible trends in the industry. Several interesting approaches to managing a cryptocurrency portfolio considering Bitcoin dominance should be considered:

1. Diversification during dominance weakening:

   • When Bitcoin starts to lose its market position, it makes sense to redistribute capital among various types of assets. The dominance formula can be applied to any cryptocurrency, allowing for the identification of the most dominant assets and investing in them.

2. Proportional balancing of portfolio assets based on dominance:

   • The approach of measuring the dominance of all cryptocurrencies can be used to allocate capital across assets according to their ranking in the dominance index.

3. Diversifying the portfolio to reduce cryptocurrency risk:

   • It is important to always invest in different types of digital assets. The portfolio management method is often determined by the preferred risk style and market factors. The Bitcoin dominance index can be used to adjust the risk level depending on the overall trend in the blockchain industry.

Portfolio Management Tools:

1. Statistical arbitrage with automated systems:

   • Previously, the statistical analysis method was used only by advanced financial institutions, but modern traders can spend a few weeks on analysis and then set up an automatic trading system based on the developed method of statistical arbitrage.

2. Portfolio monitoring tools:

   • Platforms for portfolio management are extremely important for a trader with a diversified portfolio. Various tools can be used, for example, WunderTrading, which offers a convenient approach to managing bots and assets through a single control panel.

3. DCA bots for accumulating assets during Bitcoin dominance decline:

   • This approach is preferred by traders interested in increasing the share of $BTC in their portfolio. When $BTC's market capitalization declines or grows more slowly than other tokens, focusing on buying Bitcoin makes sense.

Constantly monitoring portfolio performance and regularly making adjustments are important aspects for all investors. Modern tools allow for creating complex diversification systems, which helps minimize risks and increase investment returns.

Potential Drawbacks of the Bitcoin Dominance Indicator

The Bitcoin dominance index is often criticized due to its dependence on economic uncertainty and its influence on investor confidence in its suitability for market assessment. Here are some key drawbacks of this indicator:

Factor Description High volatility of cryptocurrencies Significant price fluctuations over short periods can substantially affect dominance indicators, creating a distorted view of the real impact of $BTC on the market. Limited blockchain network growth Bitcoin's network capacity is an important factor that affects the perception of the dominance index. Delays and cancellations of transactions due to high fees can negatively impact Bitcoin's prospects and, consequently, the dominance index. Issues with market capitalization calculation

The evaluation of metrics underlying the dominance index calculation is imperfect. This adds additional uncertainty to the indicator's readings.

The Bitcoin dominance index can be a useful tool for gaining a more comprehensive understanding of the current market situation, but it should not be overly relied upon. It should be used in conjunction with other indicators and analytical methods for a more accurate assessment of the cryptocurrency market.