Why Does Market Cap Dominance Matter?
Neither this post, nor any other on cryptofal.com should be taken as financial advice. It is not.
This post is an excerpt from the January 2022 newsletter.
The cryptocurrency industry has plenty of data and metrics that can help traders, developers, and consultants alike. From the information that the blockchain records, to information from technical indicators, there’s a wide array of tools at our disposal as investors, traders, and content creators. Two of the most common terms you’ll hear are market cap dominance, as well as ratios. In crypto, you’ll often find people referring to market cap dominance and ratios to BTC or ETH.
So what makes these so relevant/important?
First, let’s define these terms. Market cap dominance uses the total overall cryptocurrency market cap as the hard total. Then, it looks at what percentage BTC’s market cap makes of that total, what ETH’s market cap makes up, and what the total market cap of altcoins make up (this can either include or not include Ethereum). So, when you hear BTC dominance, what they’re referring to is the percentage of the overall cryptocurrency market cap that BTC’s market cap makes up.
So now that we know what market cap dominance is, why is it so important?
Market cap dominance helps provide an idea of where the money entering the space (or leaving) is going. When BTC dominance moves up, that means BTC is taking up a larger portion of the overall market cap, which means it may be outpacing ETH and altcoins. This can also happen in the reverse way where BTC dominance percentage may be dipping (from 40.8% to 40.4% for example) as altcoin and/or ETH dominance is increasing. This would mean that altcoins and/or ETH are outpacing BTC. This tells us that currently, altcoins or ETH are potentially either yielding more gains than BTC (outpacing it) or BTC is taking more percentage losses than altcoins/ETH. Market cap dominance can be followed on both shorter-term trends as well as longer-term trends.
One of the reasons we look at this in the longer term is to see where longer-term trends of money inflow have been going. This helps show us how strong these patterns of money inflow are over time. Longer-term patterns tend to be much stronger than shorter-term ones.
These types of market cap dominance are great when looking at BTC, ETH, and altcoins as larger categories of dominance. But how would you isolate a specific token’s movement from that of larger market movement dictated by BTC or altcoin market movement dictated by ETH and/or other altcoins?
The best way to isolate a coin's movement from that of the broader market is to look at its ratio to BTC and sometimes even ETH. Oftentimes, BTC and ETH dictate the broader market movement. This means for a large portion of the time, altcoins will follow BTC and ETH movement with fairly similar percentages (in either direction). Some of the time, certain coins may outpace either BTC, ETH, or both. One of the most useful ways for telling if a coin is outpacing BTC or ETH is to check the ratios.
At FAL, we use Tradingview to check ratios. You can check a ratio by going into the Tradingview chart section and typing in token ticker/BTC or token ticker/ETH. These charts directly show the price in BTC or ETH of that specifically chosen token. When you see the price in BTC or ETH go up on these charts for a specific token, this means that that coin is outpacing BTC, or gaining higher percentages in returns. These altcoin to BTC ratios will often move together to an extent. So when a large portion of altcoins start to outpace BTC, you often will see altcoin dominance increase. When this happens, BTC dominance will often decrease (depending on whether or not ETH dominance is included in your metrics of altcoin dominance). Sometimes altcoin dominance can increase when it does not include ETH as well, this often will mean that ETH is holding steadily and altcoins are outpacing it.
It’s important to remember that both dominance and ratios are only partial factors in identifying market trends. They should not be the sole deciding factor in making an investment decision (this is not financial advice).
The full newsletter can be read here.