On our Telegram Chanel YOUR CRYPTO BOSS publishes daily analysis on the market with the following phrases every time: “…Capitalisation -n billion, Dominance Index -n%…”.
It is clear with capitalisation — it is the sum of all crypto currencies multiplied by their value, but what is the dominance index? First we need to clarify that we are talking about the Bitcoin Domination Index over Altcoin, and now we will move directly to its definition.
What is the Bitcoin Dominance Index?
Bitcoin Domain Index (BDI) — statistics that reflect the share of bitcoin in total volume of all existing crypto currencies. For example, as of the fifth of August 2020, the total capitalisation of the cryptocurrency is $343 billion and the bitcoin capitalisation is $231.7 billion or 61%. The Bitcoin Dominance Index is calculated as follows: (Bitcoin capitalisation / cryptocurrency capitalisation) * 100. The average Bitcoin Domain Index since its inception is 60%, and CoinMarketCap was the first service to track it.
The IDB is used to determine the emerging trend in the crypto market. At moments of high volatility and correction in the market, the index helps to determine the demand for Bitcoin. Essentially, the Dominance Index indicates two states of the crypto market:
- If Bitcoin Domination Index increases, the Altcoins are cheaper compared to the BTC.
- If Bitcoin Domination Index drops, the Altocoins become more expensive towards the BTC.
A logical development: when the IDB is high, traders tend to try to enter BTC positions, when the IDB is low, traders move Bitcoin to Altcoins. But in practice it looks a little different: when the IMB is low, traders prefer to hedge their positions, e.g. in stablecoins. However, this only happens when altcoins go up in price against Bitcoin, at a time when the main crypto currency is not strongly dominated. This situation could be observed in 2017 from February to June: IBD on February 1–85.47%, June 1–42.92%, and the price of BTC rose from $973 to $2,536 during this time. As you can see, the Bitcoin Domination Index was declining despite the rise in the BTC itself — at the same time altcoin was actively gaining value, which prevented Bitcoin from taking a dominant market share.