Bitcoin dominance indicates Bitcoin’s share of the total cryptocurrency market value, reflecting investor preference between Bitcoin and altcoins. Higher dominance often signals caution, while lower dominance implies increased risk-taking with altcoins. This post explores dominance trends, highlighting Bitcoin’s steady rise since 2022 despite frequent fluctuations. By examining specific examples like BTC versus ATOM and XRP, we illustrate how systematic trend-following strategies effectively manage risks and capitalize on Bitcoin's long-term outperformance. These methods allow traders to avoid significant drawdowns common in simple pair trades and diversify across multiple altcoins, enhancing overall returns even during periods without clear market trends.
Bitcoin dominance is basically the percentage of the total cryptocurrency market’s value that comes from Bitcoin. In other words, it tells you how much of the entire crypto market is made up of Bitcoin compared to all other cryptocurrencies combined. A higher Bitcoin dominance means investors are favoring Bitcoin over altcoins, often signaling cautious or risk-off sentiment, while a lower percentage suggests that altcoins are gaining momentum and investors might be looking for higher returns in riskier projects.
Now let's look at how it has evolved over time.
Ever since the bull market of 2021 has ended, it has been slowly grinding up.
However, even during this period, there have been multiple 20-30% drawdowns.
But it also depends on how you calculate it. For example, if you chart BTC/OTHERS, it gets worse. It certainly doesn't just go straight up. Especially if you look further to the past.
Here is another version, each is a bit different. But the long term trend since 2022 is clear no matter how you look at it.
It makes sense it looks worse on these 2 charts, since they look at all altcoins and there are new ones being created every single day, which drags the ratio down. But that doesn't have to concern us, since we only trade specific number of coins.
Let's look at what we know so far and make some observations:
This is BTC charted against ATOM – an altcoin that was very popular during the bull run in 2021:
Since 2022, this chart is up 1800%.
You might now think it could be a good idea to then just go long BTC, short ATOM (or any other alt) and let it be. There are a few reasons why you might not wanna do that. I won't really go into them, but even by just looking at the chart, you can see you would be in a drawdown since Jan 2021 to Apr 2024. From the top in Jan 2021, it went down about 85%. And even during the small altseason we had recently after Trump got elected in November, it went down nearly 50%. Alts can sometimes go up a lot in a short amount of time and BTC can't match them. Our trend-following strategy takes advantage of that.
Now lets take a look at what would happen, if we applied such trend-following approach to a spread between BTC and ATOM.
Notice, how we managed to avoid the drawdown during late 2024 altseason.
I know, the performance isn't that much better, since BTC/ATOM was going up only during the last 2 years anyway.
But here is another example. This time XRP with focus on the last year:
As you might know, XRP went ballistic during November and outperformed Bitcoin by a lot. If you simply had this pair trade open, you wouldn't be too happy. But such a huge drawdown was avoidable.
Sure, trading BTC/XRP didn't make us any money during the last 6 months (nor did it lose), but other symbols did. And thanks to the fact that we have hundreds of altcoins on CEXes, we can trade more of them at once and diversify, which really improves the Sharpe Ratio. There are always some alts that are in a long term downtrend against Bitcoin. And now it seems more clear than ever, that Bitcoin will continue to outperform. So why not take advantage of it. Especially, when it gives us the ability to make money during periods of crypto chop, where momentum / trend-following strategies can't do much, since there simply isn't any trend.
Remember WIF? It was a really hot memecoin throughout the whole 2024, but once it has lost it's appeal, like 99% of alts do, our strategy took advantage of it and shorted it against BTC. It was a great hedge against the downturn in January and February. It is simply the destiny of every alt. Sure, there will be windows, where most of them pump and outperform, but we are ready to shift into defense and let our other strategies print.