Generally A Good Indicator
Bitcoin dominance is often utilized, especially by traders looking to discern the next altcoin season or rally. It has been a fairly good indicator over the years and still holds incredible importance when it comes to navigating the altcoin market. If you are one of my more regular readers, you will be aware of my “rule” when it comes to indicators: Never use a single indicator in isolation. I am a firm believer in finding confluence. In other words, finding multiple indicators that are pointing in the same direction. Confluence decides direction, just as volume moves and sustains market moves. Below is the current chart for the Bitcoin dominance, which reveals that the dominance for BTC has been ranging between 39% and 47% for the past seven months or so.
There have been three prominent attempts of a reversal, which have all subsequently failed. These events are the multiple bear market rallies we have experienced since BTC found a local bottom at $17.600. The dominance does not necessarily rise alongside price, but it oftentimes does. The Bitcoin dominance is currently experiencing a bounce off of support and is attempting to give it another shot. However, all is not quite as it seems. A quick visit to CoinMarketCap will reveal that there are currently more than 21K altcoins in circulation. This number has grown quite significantly in the past year or two, which leads me to the following Deduction.
Not A True Reflection
That’s right, I think that in real terms, Bitcoin dominance is a lot stronger than the “official” number indicates. The market is being flooded with junk coins that appreciate and then fall to zero. However, as fast as they die, new ones arrive. This creates a false representation of altcoin strength. A percentage of the strength seen in the altcoin dominance is actually non-existent. It’s merely a mirage created by a constant flow of junk coins that have no real utility or value. Eventually, the market identifies them, but until that point, they are overinflating the altcoin dominance. This ultimately supports my approach of achieving as much confluence as possible. Relying on a single indicator is rather risky. After all, there could be multiple factors at play that are rendering a somewhat skewed presentation of data.
On the other hand, the more indicators you make use of, the better chance you have of gaining a more accurate interpretation. As I just mentioned, a single indicator could always be manipulated in one way or another. However, with multiple indicators and data, we are able to comprise a more comprehensive thesis. Next time you make use of Bitcoin dominance, perhaps consider that finding additional confluence will help solidify and validate your thesis.