Often in the headlines of cryptocurrency media we see a reference to the dominance index of bitcoin. But usually there are people who don’t know exactly what it is and what information it’s carrying. In this paper we will elaborate on this aspect.
Definition
The Bitcoin Dominance Index (BDI) is a statistic that displays the proportion of bitcoin in all existing cryptocurrencies. At the time of writing, the bitcoin dominance index is 51.7%, with a capitalization of $1.046 trillion and the total market of $2.024 trillion. Calculate the dominance index of bitcoin in manual as follows: (Bitcoin capitalization / Cryptocurrency capitalization) * 100. Since the existence of the market crypto, the average IDB has been 60%. With the Bitcoin Dominance Index, it is possible to determine the upcoming emerging trend in the crypto market. If there is a moment of correction or high volatility, the IDB helps determine the demand for the main cryptocurrency. Typically, a dominance index shows two states of a market crypto:
- As IDB grows, altcoins are cheaper than Bitcoin.
- With the fall of the IDB, altcoins become more expensive, in relation to bitcoin.
Using this information, the market situation would be as follows: with a high EDI, traders prefer to buy BTC, and at a low level, sell. But if we look at the reality of the market, the situation is different: if the bitcoin dominance index decreases, traders prefer to hedge.
For example, they can transfer their stablecoin funds, which have minimal volatility. You don’t see this on the market very often, only when the SDI is not very pronounced, when the altcoins are high. A similar situation occurred in 2017, from February to June: February 1 – 85.47%, June 1 – 42.92%. The BTC price increased from $950 to $2,500 over the same period. As it turned out, IDB declined at the moment of Bitcoin growth, all due to the parallel growth of altcoins.
It is worth noting that at the moment of the DBE’s overwhelming level, traders still prefer to use BTC rather than just steak coins and dollars. The thing is, when Altcoin is in the money, it’s in two flanks, one Bitcoin and the other Bitcoin.
If you miss the moment to convert assets, you can incur losses. Such reception is called «escape to safety».
Interesting theories
There are many theories and guesses about the Bitcoin dominance index. Many people from the crypto community around the world recommend not using this indicator when assessing the market situation, because they believe it is not objective. From the entire mass, two can be distinguished:
- According to Chainalysis, about 2.5 million BTC were lost. This is not a small percentage – almost 12% of the total Bitcoin emissions. There are also a large number of Hodlers that have acquired BTC since the early days of the crypto market, that is, in the years 2012-2013. However, the dominance index counts all BTC releases, even those that do not participate in the turnover.
- The IDB is adversely affected by airdrops.
Let’s start with the first point. The claim is justified, but why is it only Bitcoin? There aren’t many other crypto purses with altcoins that their owners have lost access to. This means that only Bitcoin in circulation and all Altcoins must be considered in calculating the SDI. In that case, the dominance index will again be biased. Moreover, one has to be realistic: bitcoin remains the main cryptocurrency in which huge sums are invested. Even if you remove about 4 million BTC when calculating an IDB, it will still hold a significant market share.
The second point. What should be the cost of tokens and in what quantity should they be distributed on airdrop, so that this has at least some effect on the dominance index? The most famous project that conducts regular airdrops is BitTorrent. Its current value is – $0.008034, and the circulating offer is 659,952,625,000 BTT. If you multiply the two, you capitalize $5.3 billion. That’s enough to cause a little volatility in the crypto market. Only airdrops from BitTorrent have been held since 2019, and before they began, there was already a certain amount of toxins in circulation. It turns out that in order to cause volatility in the crypto market and somehow affect the IDB, you need to simultaneously distribute 659 billion BTT. Only here such a development is extremely unlikely. Aidrops can’t affect the IDB, or they can if one token being distributed costs about $1,000.
Why can the IDB change?
The answer is simple: the more new directions appear in the industry crypto, the smaller the dominance index becomes. You don’t have to expect it to go down to 10%. Of course, in the distant future, this is a possibility, but it’s not going to happen anytime soon.
The dominance index is now directly influenced by two new branches of the industry’s cryptography: DeFi and NFT. There are new projects, tokens that have value, and therefore capitalization. In fact, the dominance index of bitcoin will decline as the crypto industry develops. Let’s not forget that cryptocurrencies are a little over 10 years old, and we are now just beginning a long journey.
In addition, the Bitcoin dominance index has always been influenced by the altcoin season. At this point, altcoin prices start to rise, which reduces BDI. If you look at the dominance index in January 2021, it was almost 70%, and now it’s 51.7%. However, the value of altcoins continues to rise, and in the first quarter of 2021 the list of top 20 coins for capitalization changed. The same Dogecoin, which now ranks fifth in capitalization among cryptocurrencies.
Conclusion
The bitcoin dominance index is an indicator that helps to correctly interpret the situation in the crypto market. At the same time, there are also those who do not particularly trust this indicator, as we discussed in this article. In their view, Bitcoin has long been technically obsolete and should be replaced by new altcoins, with better scalability and fewer commissions.
However, the main cryptocurrency differs favorably from the others in its pricing. Altcoins can become impulsively expensive, and then lose all value. Bitcoin, in this sense, is more stable, as it is able to constantly bring profit to traders and investors.