Bitcoin's Hidden Indicator - Social Dominance

When it comes to bullish and bearish divergences to keep an eye on for your favorite assets, the obvious ones that come to mind are typically whale behavior, average network trader returns, and even euphoric vs. fearful sentiment. But historically, one of the more consistent indicators since altcoins began to become popularized, is Bitcoin's social dominance.

14 years after Bitcoin first began, it is still the asset that allows all other cryptocurrencies to thrive or dive. It is the number one trading pair for other assets to be traded with, which means that BTC is being traded even when traders are focused on accumulating or dumping alts.

In theory, it would makes sense that the more Bitcoin is discussed relative to all other assets, the more Bitcoin is able to ascend while altcoins follow its lead. If altcoins are the assets taking the primary focus of trader discussions and trading, then Bitcoin doesn't necessarily have to follow it. In fact, more than likely, the market cap of BTC is shrinking when traders are euphorically moving their funds out of the #1 asset in crypto, and into more volatile and speculative assets.

With this explanation out of the way, let's take a look at how Bitcoin's social dominance has looked compared to other assets in crypto. At Santiment, social dominance is measured by looking at the percentage of discussion of one asset (on crypto platforms) compared to the other discussions happening amongst the top 100 market cap assets.

So in the case of BTC, we're looking at the percentage of discussion related to BTC compared to the other 99 assets within the top 100. And we have also subtracted the final output by 20%. We'll get to why in a moment:

Bitcoin (BTC) Social Dominance Oct 2021 - Oct 2022

As we can see, the past year has seen BTC dominance below the 20% line for essentially the entire year other than mid-June to early August. You'll notice the 20% line is actually marked down as the 0% line on the axis. The reason is that, based on backtesting, this is what we've personally seen as the "Social Dominance BTC Health Line".

So to make it easy, anything below the 20% line is considered a dangerously low amount of discussions about the asset that allows the rest of crypto to surge. The times in which crypto is most prone to downturns is when altcoins and sh**coins are the projects traders are actively focused on, and are ignoring BTC.

On the other end of the spectrum, the times in which crypto is most prone to an upswing is when altcoins and sh**coins are being ignored, and BTC is the dominant topic of focus in crypto.

So with downturns happening mostly when BTC's social dominance was low over the previous year, let's take a look at how the pattern was the year prior. We adjust slightly, moving the break-even line to 25% social dominance, since altcoins take slightly more discussion away from Bitcoin every year as more projects are introduced:

Bitcoin (BTC) Social Dominance Oct 2020 - Oct 2021

We saw a major surge of Bitcoin interest at the end of 2020, and prices were absolutely rocketing. As Bitcoin social dominance started decreasing, we saw many price peaks before social dominance eventually went into the negatives in April, 2021. And price quickly fell off a cliff during its long stay below the 25% line.

From June through August, there was a more mild amount of social dominance in Bitcoin as the price eventually found its bottom. Prices recovered from July through September, social dominance began to spike, and then prices took off again. Looks fairly correlative to me!

How about one more year? October 2019 to October 20 is probably the furthest back that this social dominance indicator chart is somewhat relevant. Three years ago, there were simply far less existing altcoins, and Bitcoin had a more steady grip on crypto. When that is the case, the social dominance rule can't get much higher than 30% as a good break-even point, because project discussion gets a bit too randomized relative to Bitcoin before 2019.

Regardless, let's take a look:

Bitcoin (BTC) Social Dominance Oct 2019 - Oct 2020

Well, almost all of BTC's social dominance is well above the 20% line, so it makes sense why social dominance is on average higher. But we can still see that crypto generally erupted when dominance was extremely high, above the highlighted 30% mark.

Meanwhile, the valleys of BTC social dominance that occurred in 2020 were met with mainly corrections shortly after. You can see the sudden drop in early February that led to a price top. Then of course, covid hit in March, 2020, which was somewhat of an anomaly and unfair to judge this indicator based on those circumstances.

The late April drop was short-lived and didn't have an effect. And then the major drop in social dominance occurred in early September, and what do you know? The price dropped big just a few days after that drop into negative territory on September 4th.

So it's pretty clear that high social dominance toward Bitcoin leads to good results, and it really shows the power of seeing what proportion of discussion dedicated to an asset, can lead to. And how it has some greating leading indication properties.

And we can also apply the percentage of discussion of Bitcoin toward similar social metrics on other areas of Santiment. In a sense, people discussing Bitcoin at high levels is almost subtly like a fear indicator. Because altcoin discussions are diminishing during these high BTC dominance intervals, Bitcoin interest usually is rising because it's less volatile than alts, and is relatively "safer".

So in the same way, we can apply this logic to a Social Trends graph revealing the frequency of bullish and bearish sentiment related discussions. When there are a high amount of words being spammed that signify euphoria, such as "buying" or "bullish", this often coincides with a high BTC social dominance. Because people are flocking into the more volatile altcoin assets if they believe markets are all pumping. So they can earn a higher percentage return in the portfolios. Makes sense.

In the same respect, when there are a high amount of words being spammed that signify fear, such as "selling" or "bearish", this often coincides with low social dominance. Crypto traders are staying away from the high risks, because they want to keep their assets in BTC until prices drop down to their target levels.

Let's take a look at this concept visually:

Euphoric vs. Fearful Sentiment Spikes (Santiment Social Trends)

We've highlighted five instances where there was a particularly far or particularly close gap between euphoric and fearful words being talked about on social media:

1) Mid-January, 2022: Major bearish sentiment appeared as prices were freefalling. The price immediately bounced right up until the Russia-Ukraine war announcement in late February.

2) Late April, 2022: The largest euphoric spike of the past year occurred, and then three days later, prices tanked following negative FOMC report.

3) Early June, 2022: Not nearly as high of a euphoric spike, but still very noticeable. Prices dropped fairly immediately down to the lowest BTC price level of the past year.

4) Mid-August, 2022: A fairly sudden euphoric spike showed up as traders were beginning to get comfortable and confident in their portfolios once again. Prices then immediately dropped all the way back to near year-low levels over the next two weeks.

5) Early October, 2022: An interesting rise in negative sentiment began forming without much positive sentiment showing at all. This close gap indicated that traders were expecting October to be a rough month. Instead, prices (especially altcoin prices) have recovered quite quickly as we jump into November.

The point of looking through these charts is to show that there really is alphs in social data. We just need to be patient and really stay disciplined with our strategies when the crowd is urging us to go all-in on altcoins, or join in all the lambos and moons people are spamming about everywhere.


Disclaimer: The opinions expressed in the post are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product.

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