BTCDOM: An underappreciated gem of an index

Six weeks ago, on 6th of May, The Bitcoin Dominance Index was launched on Bitfinex. It trackes the relative price movement of Bitcoin vs. seven altcoins. More precisely, it measures the relative price movements of these equally weighted pairs: · ETH/BTC · EOS/BTC · LTC/BTC · XRP/BTC · BCH/BTC · BSV/BTC · XTZ/BTC · XLM/BTC Bitcoin increases against these seven tokens, the index goes up, otherwise it goes down. To ease measurement, the starting price was set to $100. Hence, if you are bullish on alts you short the index, and if you are either bearish on alts or more bullish on Bitcoin than on alts, then you long the index. So far the index never fell below $100 and peaked at around $115 on May 14th. What is remarkable that there is extremely low volume on the pair. Still, there have been no price wicks (the one on May 12th only looks like a wick, but prices went crazy that day and the index kept track smoothly), since the order book seems rather liquid compared to the low volume. This liquidity can also be seen on June 9th, that showed quite some volume but without any price effect. One characteristic that cannot easily be spotted on a graph is the correlation to the Bitcoin price in USD. One would expect that a Bitcoin Dominance Index has a positive correlation with BTC/USD, after all, it should track Bitcoin’s success. But that is actually wrong. I took minute price data of the BTCDOM mark price and BTC/USD to find out that there is no statistically significant correlation between both price feeds (neither significant, not strong)! That effectively means that the correlation between Bitcoin and the seven altcoins of the index is so strong that the absolute movement in USD terms does not have any effect on BTCDOM. This independence of the BTC/USD price makes BTCDOM an even greater product to trade. It does not only let you bet on the relative performance of Bitcoin vs altcoins, but also allows you to do so without getting any exposure to BTC/USD that you would need to hedge. This makes it a nice and pure bet. Apart from this, BTCDOM can also be a great hedge for larger and thus illiquid or locked altcoin holdings. For example, consider you have a portfolio of $100 and would like to allocate $50 to Bitcoin, $30 to cash and $20 to altcoins, but have $50 locked in altcoins, $30 in cash and an underexposure of only $20 in Bitcoin. Then you simply buy $30 of BTCDOM to reach your target exposure.