How to increase profit and reduce risk using Bitcoin dominance chart
By Andrey Mastykin on ALTCOIN MAGAZINE
We remember a classic investment rule that simple risk diversification reducing risk and increasing potential profit. On the other hand, data for a last year show us ineffectiveness of such tactics in the crypto market. So, is it worth to diversify your crypto portfolio, if Bitcoin by own is less risky and more profitable?
Why Bitcoin dominance is matter?
Bitcoin dominance is the statistical Bitcoin to altcoins ratio in general capitalization of the crypto market. For investors this useful to follow ratio in order to minimize risks and maximize portfolio performance.
The historical data has been collected by https://coinmarketcap.com/ is demonstrating changes in the paradigm of the early crypto era, when Bitcoin dominance was constantly declining. This trend was caused by the appearance of numerous altcoins, which proposed different technical improvements of the blockchain technology. In 2017 the descending trend reached its bottom line when ratio fell to 33%. Today, it’s near 60%.
During the massive correction of last year, Bitcoin lower volatility have caused its capitalization proportion outperforming altcoins. Interesting that this tendency has been continuing even during fast market growth of recent months.
My personal opinion that Bitcoin dominance will be higher of 40% in the coming years, because of unproportional acceptance by financial sectors. I accept that Bitcoin can easily become the digital analog of gold with multi-trillion capitalization. However, no one knows the future, and no one knows where a black swan can fly from. Investors should be prepared for any developments and have a working plan.
So, how to trade BTC dominance?
Let’s consider the most common scenarios.
Interesting, that we can benefit Bitcoin dominance changes using simple technical analysis and logic for creating a crypto portfolio.
For trading Bitcoin dominance we need just two charts. First one is a chart of crypto market capitalization, the second one is a chart of BTC dominance. Both of them is calculating https://www.tradingview.com, so any trader can easily analyze charts using standard tools.
First step. The trend is your friend. Like investors and long-term traders opening crypto position, first of all, we are interested in long-term up-trends in the cryptomarket. For such analysis, we can use https://www.tradingview.com crypto total market cap index (ticker: TOTAL). To detect long-term up-trend you can use any indicator you personally like, I prefer 200 MA.
On the chart above, we can see a profound bull market, that technically has begun on April, 2. On April, 20 we got an a ``golden cross” of 50 MA and 200 MA that is another strong bull pattern. So, our first decision could be to turn crypto on.
The second step is to detect a proportion of BTC and altcoins in a portfolio. In this case, the chart of Bitcoin dominance from https://www.tradingview.com (Ticker: BTC.D) is a good choice. I’d prefer to hold pure BTC, when dominance is in up-trend and rebalance a portfolio, when dominance is in downtrend, but general market cap is still growing.
Just using these two chars investors can significantly reduce their risk increasing potential profit.
Of course, this is a simplified description of the method. There are plenty of other important issues. For example, how to collect good altcoins for portfolio keeping investment approach? I’ll try to describe my attitude to this problem in the following posts.
Read also, why I believe BTC can achieve 15,000 this year.
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