The BTCDOM index is a tradeable index offered by Binance that enables traders to get a sense of Bitcoin’s value relative to that of the broader cryptocurrency market.
When the market share for altcoins increases, Bitcoin’s dominance loses value, as does the BTCDOM index. The opposite is true as well, because when Bitcoin’s market share increases, the BTCDOM increases as well.
Trading the index affords traders the ability to trade on longer trend movements. This way traders have a potentially safer alternative for speculating their funds than directly on BTC.
Bitcoin is the number one adopted crypto globally, with an estimated 100 million users. As any BTC maximalist would let you know, Bitcoin is the most decentralized, secure, scarce, and reliable crypto asset available to everyone who has access to the internet.
Therefore, estimating the value of Bitcoin’s market value in relation to the rest of the cryptocurrency market is incredibly useful to gain a broader perspective. Using a tool such as Bitcoin Dominance Index (BTCDOM) can help traders weigh the options available to them on exchanges like Binance.
What is Binance BTCDOM Index?
The BTCDOM index is offered by Binance that enables traders to speculate the relative performance of Bitcoin against other cryptocurrencies. Similar to the Bitcoin dominance indicator, the BTCDOM uses a pricing index to reflect the relative value of Bitcoin. However, unlike the real Bitcoin market dominance indicator, which is capped within 0~100%, the BTCDOM index is uncapped and more suitable for derivatives trading.
How To Take Advantage of BTCDOM Index
The BTCDOM index is helpful under several situations and can be used to confirm how important/relevant Bitcoin is at any given time. For example, macroeconomic uncertainties and failures have been strongly correlated to increases in Bitcoin’s market share. Additionally, increased adoption of Bitcoin, as a means of payments or a store of value, can significantly impact Bitcoin’s demand relative to other cryptocurrencies. These events can be tracked, and even watched in real-time using the BTCDOM index. The index more accurately demonstrates the relative demand for Bitcoin or other cryptocurrencies than simply watching the price of BTC.
The BTCDOM index is certainly useful when searching for signals that indicate the prevailing market cycle. For instance, when the market share for altcoins increases, BTC’s dominance loses value, as does the BTCDOM index. The opposite is true as well, because when BTC’s market share increases, the BTCDOM increases as well.
As such, the index can be used by traders to learn about crypto market cycles and understand the relationship between Bitcoin and other cryptocurrencies.
Can You Use the BTCDOM Index to Predict Market Cycles?
The BTCDOM index is useful to an extent but should not necessarily be used to predict market cycles entirely. Instead, traders can consider using similarities between past market cycles coupled with the insight found on the BTCDOM index to speculate on upcoming market trends. For example, at the start of previous Bitcoin bull markets, there were also uptrends in the number of altcoins and support for altcoins.
The amount of altcoins in the market is always changing, with new ones surfacing and others self-terminating. New altcoins appear during bull runs, and in similar fashion, those new coins die off when the market turns bearish. This makes the volume of the market outside of Bitcoin less reliable and harder to adjust for. In addition to the new altcoin players, the amount of bitcoin that is ‘hodled’ (held for more than one market cycle, potentially permanently) is almost always increasing. And in a similar fashion, there are many precious satoshis that have been forgotten or have become inaccessible due to a loss of key phrases. These inactive coins also inhibit the accuracy of BTC domination estimations.
Thus, the index doesn’t give highly reliable indications of upcoming trends but instead can serve as a gauge of market activity. When large amounts of Bitcoin are being bought and when altcoin support is growing in parallel, traders could speculate for bullish movements. Conversely, when altcoin projects die off along with the support for them, and when BTC support is also diminishing, traders may decide bearish movements are ahead. However, the world of crypto is known for extreme volatility. Unexpected influences to the market can happen at any point, FUD can scare new investors, and euphoric purchasing can inflate cycles beyond the average speculation. No tool is perfect for predicting cycles, but the BTCDOM index is a good snapshot of the current market sentiments.
Why Trade BTCDOM Index?
Trading the BTCDOM index can be beneficial to traders who don’t wish to trade upon highly volatile cryptocurrencies, but rather on the market dominance of Bitcoin. The index is much less volatile and more predictable than BTC itself is. In addition, trading the index affords traders the ability to trade on longer trend movements. This way, traders have a potentially safer alternative for speculating their funds than directly on BTC.
Furthermore, the BTCDOM Index provides a broad market benchmark to support:
Asset allocation: You can now balance risk and reward by apportioning your portfolio's assets to capture market cycles.
Performance measurement: The benchmark will be available for more targeted investment mandates, for instance, a performance comparison between Bitcoin vs. other cryptocurrencies.
Hedging: You can efficiently manage risk by hedging with the BTCDOM index perpetual contract. For example, long-term investors in Bitcoin can use the index as a short hedge to reduce price volatility.
Short-term and momentum trading: In trending markets, there are times when Bitcoin outpaces altcoins as investors’ sentiment shifts, presenting trading opportunities for short-term traders. You can now capture short-term trends, enabling you to be flexible and reactive to changing market conditions. With leverage available, you can magnify relatively small price movements to potentially create profits that justify your time and effort.
The BTCDOM index can be used as a snapshot of the current market sentiment between coins. Further, the index is helpful in understanding market cycles and determining which part of a market cycle.
Although useful, the index is prone to drawbacks such as fluctuating altcoin volume in the market, as well as compensating for the amount of dormant BTC. Thus, the index doesn’t provide perfect insight into upcoming market trends. Therefore, the index shouldn’t be used alone to make investment decisions but rather paired with other tools.
Lastly, the BTCDOM index is much easier to predict over longer periods. In addition, it is less volatile because it represents a combination of crypto assets rather than one or several separate ones.
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