What Are The 3 Reasons Attributed To The Bitcoin Dominance Metric As A Flawed Indicator?

All About Bitcoin Dominance 

In this time of the pandemic, is the indicator reliable as the bitcoin dominance rate is a metric cited by many when forecasting altcoin and BTC rallies? 

On cryptocurrency ranking websites like Coin360 as well as CoinMarketCap, Bitcoin dominance has always been one of the first pieces of information displayed. There’s an argument that the market share indicator makes less sense as time goes by although it seems a consolidated and straightforward metric. 

The staggering growth of the stablecoin industry is one point to note. Should they also be aggregated on the same dominance ranking as Tether and USD Coin have seen their market capitalisation explode over the past year

Crypto investors need to understand that by merely looking at BTC dominance deciding whether or not to change altcoin allocations within a portfolio has become less effective regardless of the answer. 

Here Is The Free Float Problem

The primary reason for the popularity of the reason behind the market capitalisation metric is simplicity. Multiplying the last trade price by the number of outstanding coins allows one to view the total market capitalisation as even investors new to the game can understand. For stocks, mutual funds, ETFs, and most tradable assets, the same rationale works. 

Here when the amount regularly being traded is very little compared to the outstanding capital, the problem occurs. Based on the free float concept are some of the most relevant stock indexes worldwide. 

It works by disregarding shares that aren’t allowed to move freely as this adjustment is made to avoid the distortion caused by inflated market capitalisation. It was found that typically the result of lock-up periods or a shareholders agreement where the shares or coins which cannot move freely. 

Free float is used by the S&P 500, Nasdaq-100, CAC 40, DAX, HSI, and the FTSE-100 in traditional markets. By the percentage of shares freely available for trading, each companies’ market capitalisation was adjusted. 

Crypto Still Lacks Transparency

There is no similar rule for cryptocurrencies although the information on public stock availability might be readily available due to the US Securities Exchange Commission filings. It is easy to verify how many bitcoins has been sent to its Genesis addresses. But this is not the case of every cryptocurrency as these coins are unspendable. 

It was found that those Bitcoin holdings under Grayscale investment funds were also under lock-up finally meaning there is no way for an investor to take hold of the underlying BTC asset, as GBTC and similar funds currently have no set redemption programs. 

One can only infer how many BTC has been lost over the years apart from those most straightforward cases. Including the one million attributed to Satoshi’s mining, studies have shown that up to four million Bitcoin are gone forever. 

Even larger on forked cryptocurrencies is the free-float problem. With one-third of its supply that has never been touched, Bitcoin Cash comes as an example. 

Aggressive Supply Calendars And Double Counting Are Problematic

When referring to Bitcoin and its forks, one can argue that there hasn’t been much change in untouched and lost cryptocurrencies. It shouldn’t therefore impact the more recent BTC dominance data. It does not take into account the equivalent inflation of those coins, although this is true.here will be 20% more Ripple in circulation according to Messari data in 2020 alone. Followed by the Compound (COMP) 40%, Stellar (XLM) 17.4%, ZCash (ZEC) 15.6%, Polkadot (DOT) 13.8% and Cosmos (ATOM) 10% growths was such an increase. 

Here the fact remains that a cryptocurrency supply increase doesn’t always increase market capitalisation. Depending on the unitary price change for each cryptocurrency is this effect. Looming larger on altcoins and exerting negative pressure on Bitcoin’s dominance rate is the inflationary pressure. 

There is a basket of other cryptocurrencies backing it for every DAI issued. Backed on a 1-to-1 basis with Bitcoin, the same can be said of the ERC-20 token Wrapped BTC. Inflating cryptocurrencies market capitalisation, these are a few examples of double counting. 

When Past Performance Does Not Guarantee Future Results

The bitcoin 1,318% rally might seem unthinkable whereas the truth comes that it didn’t even make the top 10 by the performance that year led by XRP (36,018%), NEM (XEM) (29,842%), Ardor (ARDR) (16,809%), and XLM (14,441%), reflecting on the 2017 bull run. 

Creating the myth that BTC dominance must go down during cryptocurrency rallies as the term altcoin season was coined to reflect the perceived rally that takes place when Bitcoin’s; dominance rate drops with the initial 1,318% move. 

In early 2018, take notice of how BTC dominance plunged from 95% to 37% as new ICOs were placed every month back then with some exceeding valuations of $5 billion. 

Regardless of bitcoin’s price increase, thereby these newcomers inflated the altcoin market capitalisation by a large sum. 

The exact opposite trend is set to fast-forward two years to the recovery mid-2019 and it’s subsequent accumulation period. 

Flattened or adjusted was when the leading cryptocurrency failed to surpass the $12,000 level, BTC dominance grew while the bitcoin price was increasing. 

BTC Dominance Shifts Accordingly To Current Listings

While bitcoin rallied from $7,100 to the current $10,200 level, BTC dominance has ceded from 70% to 60% throughout 2020. Countless factors are affecting the indicator as mentioned earlier. 

As a leading factor behind the current shift in Bitcoin dominance, some investors and analysts point to the whole emerging decentralised finance token movement. Reaching the $17 billion mark in 2020, the stablecoin issuance has also grown immensely. 

The Final Thoughts 

It is incorrect to infer a direct relationship between the indicator and bull or bear market trends regardless of the rationale behind the recent bitcoin dominance drop. Here it is noted that the current 60% dominance rate cannot be compared side-by-side with the previous years.