In the Cryptocurrency Sphere, Understanding the Underlying Logic is Far More Important than Following Charts
This article starts from causal reasoning to delve into the common misconceptions surrounding BTC.D, reminding readers not to let erroneous indicator relationships mislead their investment judgments.
(Background: The reason I will never make breakout trades: The trap of liquidity hunting by the market maker)
(Supplementary Background: A must-read for spot diamond hands: An alternative rental strategy to escape the peak)
Introduction
One of my principles in conducting research is to “understand the principles first.” Without grasping the underlying logic, analyzing the market may lead to overly fitted conclusions, ultimately costing one’s own wallet.
Today, I intend to discuss BTC.D (Bitcoin dominance) and some common misconceptions regarding its application.
Causal Relationships
One day, Person A was awakened by the barking of dogs outside. Upon waking, A found that it was pouring rain outside and discovered a basin on the floor of their home. When asked, they learned that their roommate had placed the basin to catch water because the ceiling was leaking.
Subsequently, Person A encountered the same situation a second and third time, leading them to conclude: “When dogs bark, there will be a basin on the floor of the house.”
Clearly, this conclusion has significant flaws. The logic of “heavy rain ⭢ dog barking ⭢ ceiling leak ⭢ roommate putting down a basin” is sound, but this is a common pitfall for many. The contradiction lies in: “Heavy rain leads to dog barking, but dog barking does not necessarily mean it is raining heavily.”
Must BTC.D Decline to Initiate Altcoin Season?
Similarly, let’s examine the following statements:
BTC’s price increase slows down + altcoins surge ⭢ BTC.D declines.
The timeframe of ETH’s surge usually corresponds to the timeframe of altcoin surges.
The problem arises: can we conclude that “BTC.D must decline to initiate altcoin season” based on the above statements?
Clearly, we cannot. First, it is the “slowing BTC price increase + surging altcoins” that leads to the decline of BTC.D, but that does not mean a decline in BTC.D will necessarily herald an altcoin season! (Just as rain makes the floor wet; it does not mean that if the floor is wet, it must be raining.)
Secondly, while the timing of ETH surges often corresponds to altcoin surges, this correlation is weak due to the limited historical sample size, and there is no necessary linkage between the two (no logical basis). In other words, we cannot base our betting on such an unrigorous inference process.
Finally, it seems everyone has overlooked the fact that “the market capitalization in the cryptocurrency sphere is extremely uneven.” BTC has a very high market share, but ETH, as the second in line, also possesses a significant market share. The movement of BTC.D is largely influenced by ETH.
As illustrated, I inverted the BTC.D chart and compared it with the ETH/BTC exchange rate trend, marking several benchmark 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 occurred around the same time, it does not imply that it will be the same next time.
- The trend of BTC.D is greatly influenced by ETH’s performance.
Thus, using BTC.D as a factor to judge whether an altcoin season has begun is evidently problematic. When you see a significant drop in BTC.D, it may simply indicate that ETH is rising; furthermore, 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 retroactively infer causes is logically untenable. Just as you cannot deduce that “if the floor is wet, it must be raining” from “when it rains, the floor gets wet.”
This concludes today’s discussion; I hope it has been helpful. Thank you for reading.
