BTC dominance measures the relative value of Bitcoin compared to all other altcoins and tokens combined. It is a ratio expressed as a percentage. For example '80%' BTC dominance means that Bitcoin holds 80% of all the value in cryptocurrencies, whilst alternative coins represent 20% of that total value.
For as long as I've been monitoring it (basically when coinmarketcap.com started including it on their site) the value for this metric has been maintained at over 80%, typically averaging ~82% with a surprisingly low level of deviation from that average. This lack of volatility compared to price volatility suggests to me that there is something important at play
Today BTC dominance dipped below 80% and at the time of writing is hovering at 79.7. I would like to suggest that this is a strong buy signal for bitcoin.
Although the BTC dominance metric is often ignored by many professional traders, perhaps because a significant number of them have little interest in or knowledge about altcoins, I believe that it is one of the key factors which serve the determine the 'right price' for bitcoin. The surprising lack of volatility in this metric when compared to price volatility is one indication of its importance, but in this article I will focus on the broader meaning and the market mechanics that I have come to conclude are driving this correlation.
Many people think that altcoins compete with Bitcoin. I really do not think that this is the case. Alternative cryptocurrencies draw in new users and build out new use cases, but much of the value created during this process ultimately ends up in Bitcoin.
Steemit is a great example of this. When Ryan X Charles, the ex-Reddit engineer building the Yours.Network (basically reddit with bitcoin integration), suggested in a blog post recently that a service using its own currency like Steemit wouldn't be able to compete with alternatives that use Bitcoin, due to the large network effect of the original digital currency, he forgot one thing. ..
If there is one thing and one thing only that it is always very easy to do with any altcoin that has reasonable volume it is to sell it for bitcoin. Exchanges like Poloniex, which do not handle fiat, have very few requirements for new traders and a very easy registration process. Anybody who can use Steemit will have no problem converting their coins to BTC if that is what they want. And many of them will want to do exactly that.
If BTC dominance was falling due to a single competitor threatening to replace Bitcoin then my analysis would be very different. But as things stand that is not the case - Ethereum is rising, Steem has surged in value, and a significant proportion of the rest of the top 100 coins are trading at over their 30 day average.
Ultimately, this is creating value which will end up in Bitcoin. Some of this latest crop of winners will fall dramatically, returning most of their value to Bitcoin. Others will continue to succeed, drawing in new money and funneling a portion of that back into Bitcoin.
Altcoins are starting to come into their own, genuinely driving new use cases and bringing in new users, and as a result I'm going to go out on a limb and make a prediction: Bitcoin is cheap at its current price, and will soon break upward to test $700.
BTC dominance will return to >80%, probably hitting ~83-84%, at which point the pendulum will swing; the new wealth created among bitcoin holders will then drive further investment in alternative blockchain projects, continuing the virtuous cycle as the rising tide lifts all boats :wink: