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Falling Bitcoin Dominance May Lead Spectacular Altcoin Returns

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Drops in Bitcoin dominance coinciding with drops in its price may act as a strong leading indicator for short-term altcoin gains. A look at the data shows promising results.
A peculiar event happened last week — as BTC’s price decreased, so did its dominance. Such a development goes against this year’s trend of ever-increasing Bitcoin dominance. Since the end of 2018, Bitcoin dominance began to climb from 30% to more than 60%. At its peak, Bitcoin Dominance neared 70% this quarter. Bitcoin is the undisputed leader in the industry and its price movements tend to drive the direction of the market.

BTC Dominance by CoinMarketCap

Given that altcoins generally suffer more than BTC during difficult market conditions, dominance falling simultaneously with the price is a noteworthy development.

Several hundred such instances occurred in the past several years. But their nature is not always the same — requiring the use of clustering. One possible arrangement is to group them according to how long each occurrence lasted. Examining altcoin performance since 2016 (capitalization excluding BTC) shows that the BTC price falling together with its dominance was followed by spectacular returns. 

Average ROI of Altcoins after Simultaneous Drops in BTC Price and Dominance Since 2016

Days* Number of Occurrences 7-day ROI (%) 30-day ROI (%) 90-day ROI (%)
1 177 2.04 20.39 111.47
2 50 11.25  39.30 110.56
3+ 18 19.11 47.35 187.81

*Number of consecutive days BTC price and BTC dominance drop concurrently.

Pricing data by CoinGecko

The analysis shows great results. The return on investment averages over 20 percent after 30 days for a single occurrence. However, the data is misleading — these returns are skewed by the “original” altcoin season of 2017. It was common practice previously to sell BTC and diversify into altcoins.

Excluding data prior to 2018, the picture looks decidedly different.

Average ROI of Altcoins since 2018

Days* Number of Occurrences 7-day ROI (%) 30-day ROI (%) 90-day ROI (%)
1 65 -2.6  -4.12  -11.15 
2 21 2.37  -6.26  -16.91 
3+ 11 10.39  11.86  7.11 

Pricing data by CoinGecko

Consequently, the one-day occurrences, which comprise the majority of tracked events, were followed by negative performance by altcoins. The two-day occurrences were able to deliver a short-term spike, but gains evaporated quickly. Only the three-day-plus instances delivered meaningful and sustained gains. This is also evident from the percentage of times returns were positive after a given occurrence.

Ratio of Positive Returns for Altcoins after Simultaneous BTC Price and Dominance Drops Since 2018

Days* Number of Occurrences 7-day ROI + (%) 30-day ROI + (%) 90-day ROI + (%)
1 65 38.46  33.85 26.15 
2 21 61.90 38.10 28.57 
3+ 11 90.91 81.82 36.36

Pricing data by CoinGecko

The most recent was a one-day occurrence on Nov. 6 and has so far shown negative after-the-fact ROI of -1.98%.

Drops in the price of BTC, coupled with a decrease in its market dominance, may be a powerful short-term leading indicator — but only when lasting for at least 3 days. The positive effect appears to dissipate after the 30-day window. In current conditions, there are few incentives for investors to significantly diversify out of BTC, since there haven’t been any prolonged altcoin rallies.

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