How to leverage the Bitcoin dominance index in your investment strategies

Understanding the Relationship Between Bitcoin Performance and Other Cryptocurrencies

If you are trading in cryptocurrency markets, you need a thorough understanding of how Bitcoin dominance moves. This indicator is not just a statistical figure; it is a real indicator of major market trends. When you see Bitcoin dominance change, you are witnessing a shift in investor behavior and capital allocation across the market.

What Happens When Bitcoin Dominance Changes?

The reality is that the relationship between Bitcoin movement and the dominance index is more complex than it appears. When the total market capitalization of cryptocurrencies increases, it may not directly reflect on Bitcoin dominance. The simple reason: if Bitcoin’s price rises proportionally with other coins, its dominance percentage remains nearly the same.

However, when there is a gap between Bitcoin’s performance and the rest of the market, the difference becomes significant. For example, if Bitcoin rises while altcoins remain stagnant, the dominance percentage will increase. Conversely, if Bitcoin falls while altcoins gain, the dominance will decrease.

The Four Main Scenarios to Watch

Scenario One: When Bitcoin rises and its dominance index also increases, you will notice that other coins experience very limited growth. Investors in this case are focusing their funds solely on Bitcoin.

Scenario Two: Bitcoin’s rise with decreasing dominance indicates genuine market health. Here, altcoins are rising strongly, and liquidity is distributed among all assets.

Scenario Three: Bitcoin’s decline with increasing dominance points to a painful mass sell-off. All coins are falling, but Bitcoin is falling worse.

Scenario Four: When both Bitcoin and dominance decrease together, the market experiences a less severe overall correction than the previous scenario.

Why Has Bitcoin Dominance Increased Significantly Recently?

During 2024, we witnessed a fundamental shift in market dynamics. The entry of dedicated spot Bitcoin investment funds changed the game entirely. Now, institutional money, major banks, and large corporations prefer direct investment in Bitcoin rather than diversified portfolios of altcoins.

These large entities have reservations about altcoins due to concerns about team performance or the risk of sudden collapses. As a result, massive liquidity flowed into Bitcoin alone, causing the dominance index to rise to around 57.40%.

The Historical Basis of Bitcoin Dominance Index

In the early days when Bitcoin was launched, the dominance index moved between 99% and 100%. There were no real alternatives for investors; Bitcoin controlled everything.

Over time, hundreds of altcoins emerged, and individual and small institutional investors entered the market. Options expanded, and the dominance index gradually declined. However, the sudden return of major institutions in 2024 changed the course once again.

What Exactly Is the Bitcoin Dominance Index?

The Bitcoin dominance index is simply the ratio of Bitcoin’s market capitalization to the total market capitalization of all cryptocurrencies combined. It is a way to measure Bitcoin’s size and relative weight in the broader market.

An important point many overlook: this index is a ratio, not an absolute measure. Therefore, if Bitcoin drops by 20% and the rest of the market also declines by the same percentage, the dominance index may remain nearly unchanged. Additionally, the total market cap does not necessarily reflect actual capital inflows, but is limited to the circulating supply multiplied by the current price.