In the Cryptocurrency World, Understanding the Logic Behind Indicators is More Important than Following Charts
This article starts from causal reasoning, delving into common misconceptions about BTC.D (Bitcoin Dominance), reminding readers not to let erroneous indicator relationships mislead their investment judgments.
(Preceding Background: The Reason I Avoid Breakout Orders: A Trap for Liquidity by Market Makers)
(Background Supplement: A Must-Read for Spot Traders: An Alternative Strategy for Landlords to Exit at Peak)
Introduction
One of the principles I adhere to in my research is to “understand the principles first.” Analyzing the market without understanding the underlying logic can lead to overly fitted conclusions, ultimately costing your own wallet.
Today, I intend to discuss BTC.D (Bitcoin Dominance) and some common application misunderstandings.
Causal Relationships
One day, A was awakened by barking dogs outside. Upon waking, A discovered it was pouring rain outside and found a bucket on the floor in their home. When inquiring, A learned: the ceiling was leaking, so the roommate placed a bucket to catch the water.
Subsequently, A encountered the same situation a second and third time, leading A to conclude: “When dogs bark, there will be a bucket on the floor.” Clearly, this conclusion has significant flaws.
The logic “Heavy rain ⭢ Dogs barking ⭢ Ceiling leakage ⭢ Roommate places a bucket” is sound, but this is also a common pitfall for many. The contradiction lies in: “Heavy rain causes dogs to bark, but barking does not necessarily mean it is raining heavily.”
Does BTC.D Need to Decline to Trigger Altcoin Season?
Similarly, let’s examine the following statements:
BTC price gains slowing + Altcoins surging ⭢ BTC.D declines
ETH surging in price typically corresponds with the time when altcoins are soaring.
The question arises: Can the above two statements lead to the conclusion that “BTC.D must decline to initiate altcoin season”?
Clearly, no. First, it is the combination of “BTC price gains slowing + Altcoins surging” that causes BTC.D to decline, which does not imply that a decline in BTC.D will necessarily usher in altcoin season! (Just because it rains, the floor gets wet; it does not mean that if the floor is wet, it must be raining.)
Secondly, while it is true that ETH surging corresponds with altcoins surging, due to the extremely limited historical sample size, there is no necessary correlation between the two (there is no logic). To put it plainly, we cannot use such an imprecise reasoning process as the basis for our betting.
Lastly, it seems everyone overlooks the fact that “the cryptocurrency market is extremely unevenly distributed.” BTC has a very high market share, but ETH, as the second-largest, also possesses a significant market share. The trend of BTC.D is largely influenced by ETH.
As shown in the figure, I flipped the BTC.D chart upside down and compared it with the ETH/BTC exchange rate trend, marking several reference points for readers to compare. We can clearly see that the shapes of the two lines exhibit a high degree of similarity!
Conclusion
To summarize:
- BTC.D is a result, not a cause.
- Although historically, the surges of ETH and altcoins have occurred closely in time, it does not imply that the next time will be the same.
- The trend of BTC.D is greatly influenced by ETH’s performance.
Therefore, using BTC.D as a factor to determine whether altcoin season has commenced is evidently problematic. When you see a significant decline in BTC.D, it may simply be that ETH is rising; and the technical chart of BTC.D cannot serve as a basis for analysis or prediction.
Once again: BTC.D is merely a result, not a cause! Using results to infer causes is logically untenable. Just like seeing “the sky is raining, the floor will be wet,” you cannot reverse infer “if the floor is wet, it must be raining in the sky.”
This concludes today’s sharing. I hope it is helpful to you. Thank you for reading.
