Crypto traders and investors continue to seek ways to predict the trends of altcoins with the number of them available in the crypto market being on a steady rise. One of the solid indicators that can help to predict the general trend of altcoins and give you an idea of what happens next in the market is Bitcoin (BTC) dominance. BTC dominance is a reflection of market sentiment. When Bitcoin is performing well, it often attracts more investment, leading to an increase in its dominance. Conversely, during periods of uncertainty or bearish trends, BTC dominance might decrease
What is Bitcoin dominance, how is it calculated, and how does it affect the trend of altcoins in the crypto market? Let’s take an in-depth look at all you should know.
What is Bitcoin dominance?
To adequately explain what is BTC dominance and how it affects altcoins, we’ll take this article one step at a time. First, you must understand the meaning of BTC dominance before learning about its impact on altcoins. So what’s Bitcoin dominance?
Bitcoin dominance is simply the ratio between Bitcoin’s market capitalization to the global market capitalization of the whole cryptocurrency market. It is the exact percentage of the whole crypto market cap value held by Bitcoin. Essentially, this metric is used to measure Bitcoin’s value relative to other kinds of cryptocurrencies and helps crypto investors and traders spot trading opportunities and make better investment decisions.
Bitcoin dominance is a very useful indicator that can be used to understand the general health of the crypto market. Also, it can provide you with good insights into the present state of the market.
How to calculate Bitcoin dominance
You can calculate the Bitcoin dominance index by just dividing the specific market capitalization of Bitcoin by the total market cap of all other existing cryptocurrencies. In simple terms, this means that:
Bitcoin dominance = Market cap of BTC / Market cap of all other cryptocurrencies
Let’s assume that Bitcoin’s market cap is $500,000, and the total market cap of all other cryptocurrencies is $1,000,000. Using the formula provided above, the Bitcoin dominance index would be 50%.
Historical performance of Bitcoin dominance
Generally, the historical performance of Bitcoin dominance is a very important metric to consider when evaluating the general health of the crypto market.
It is no news that Bitcoin has sustained its dominance since the advent of cryptocurrency, with its total market capitalization accounting for over 60% of the full market capitalization.
Nevertheless, its dominance had witnessed a considerable decrease during certain periods, such as during the bull run in 2017, when the total market capitalization of altcoins significantly increased.
Why is Bitcoin dominance important?
Bitcoin dominance is a very important metric that both crypto investors and traders can use to understand the all-around health of the crypto market. Since Bitcoin is the most dominant cryptocurrency, its values can be used to determine the strength and popularity of the digital asset and can be used as a clear indicator of the general market sentiment.
Hence, as a crypto trader or investor, you need to observe Bitcoin’s dominance to understand the current state of the market.
Strategies for trading Bitcoin dominance
One of the most lucrative ways to make a profit in the crypto market is by trading dominance. Here are some effective strategies you can use to trade Bitcoin dominance:
1. Short term trading
Short-term traders benefit from Bitcoin’s short-term price trends by simply trading on their price changes. This kind of trading can be a very profitable strategy if you can accurately predict the short-term price movements of Bitcoin.
2. Long term trading
Long-term traders can benefit from Bitcoin’s long-term price uptrend by purchasing and holding on to the asset. The long-term strategy can be profitable if the value of Bitcoin continues to increase over time.
3. Momentum trading
Momentum traders can benefit from Bitcoin’s powerful network impact by simply trading on the momentum of Bitcoin. This can be a very profitable strategy if momentum traders can accurately predict the exact direction of the momentum.
4. Altcoin investing
Investors can also decide to switch and invest in altcoins when they realize that Bitcoin’s dominance is decreasing compared to the value of altcoins.
What key factors influence BTC dominance?
Although there are a considerable number of factors that can influence the dominance of Bitcoin, we will be listing only the significant factors. Having a good understanding of these major factors will help you make informed crypto investment decisions.
1. Changing market trends
Over the last years, with the exponential growth of altcoins, BTC lost a substantial percentage of its market share. This happened because blockchains like Ethereum have programmable smart contracts and are capable of hosting decentralized applications (dApps). These are two very important features.
dApps can be used on the Bitcoin blockchain, particularly after updates like Taproot and SegWit. However, there are still restrictions on its usage because the blockchain was not developed from scratch to resolve these restrictions.
2. Investor sentiment
Investor sentiment plays a very crucial role in determining the index of Bitcoin’s market dominance. When crypto investors are generally bullish on Bitcoin, they are far more likely to buy and keep the asset, hoping for it to appreciate in value.
This can increase Bitcoin’s market cap and, eventually, its dominance. However, when crypto investor sentiment is generally bearish, they are less likely to hold on to the digital asset, and this can cause a decrease in its general market cap and, eventually, its dominance.
3. Adoption
As more people continue to adopt and embrace Bitcoin, its market capitalization dramatically increases, allowing it to maintain its general dominance. Contrarily, if fewer people adopt and embrace Bitcoin, its market capitalization will definitely decrease, thereby decreasing its dominance.
3. Regulation
The regulatory domain in which Bitcoin functions can also immensely influence its dominance. Generally, if regulatory bodies support Bitcoin, it can motivate more investors to enter the market, invest in the token, and increase its market cap, thereby allowing it to sustain its dominance.
On the other hand, if regulatory authorities are antagonistic towards Bitcoin, it can dissuade potential investors from investing their funds in the asset, subsequently decreasing its general market cap and thus its dominance.
4. Bull markets and bear market
The rule is pretty straightforward: altcoins generally rise hard and decline harder. In a bullish crypto market, the popularity of altcoins rises. This can cause investors to take profits they receive from their BTC holdings purchased during the last bear run and invest them in altcoins, NFT projects, or any other riskier asset in hopes of getting hefty returns. This can tank BTC dominance.
On the other hand, in bear markets, BTC dominance typically rises because investors strive to mitigate risk. Most crypto investors are not comfortable keeping volatile altcoins and shift to relatively less volatile digital assets like Bitcoin.
5. Supply and demand
Supply and demand is another major factor that can impact Bitcoin’s dominance. Generally, if the market experiences an increase in the demand for Bitcoin, this can eventually increase its price and market cap, permitting it to retain its dominance. Contrarily, if there is a decline in the demand for Bitcoin in the market, it can lead to a decline in its general price and market cap, eventually decreasing its dominance.
6. New coins and projects
Currently, there are thousands of cryptocurrencies existing, with a full market cap of more than $1 trillion. NFT collections such as CryptoPunks and VeeFriends have also risen up as alternative cryptocurrency assets and this is favorable for altcoins because most NFTs are built on these blockchains (like Ethereum).
As new cryptocurrencies continue to emerge at regular intervals and NFTs increase in popularity, BTC dominance is likely to have a downward trend because investors would be seeking to diversify their portfolios.
7. On-ramping via stablecoins
The rise in popularity of stablecoins, cryptocurrencies whose value is backed by a stable asset such as the US dollar or gold, has put further pressure on BTC dominance. Particularly, during a bear market or times of high volatility, stablecoins are often used to safeguard crypto investors’ funds.
Stablecoins are good options for risk-averse investors who aim to put their money somewhere safe whenever the crypto market conditions are extremely volatile. This permits crypto-native investors to remain within the crypto market without having to exit and still pay their taxes on realized profits.
Currently, stablecoins have a market valuation of more than $120 billion. Tether, the largest and most popular stablecoin, boasts a market cap of about $89 billion, which is an increase from $4.1 billion in 2020.
The market value of USDC, the second-largest stablecoin, is about $25 billion. Due to stablecoin on-ramping, the share of the entire crypto market valuation ascribed to Bitcoin has been watered down and is still currently shrinking. However, with the drop of USTC in 2022, this movement may be reversed.
Advantages and disadvantages of Bitcoin dominance
Just like any other conventional asset, Bitcoin dominance also has both advantages and disadvantages. Listed below are some of the fundamental pros and cons of Bitcoin dominance:
Advantages of BTC Dominance
Listed below are some of the advantages of BTC dominance:
1. Liquidity
Bitcoin is regarded as the most liquid cryptocurrency, with its liquidity generally outperforming even traditional assets. This makes it relatively easier to trade, which is very valuable for traders and investors.
2. Network Effect
Bitcoin has a very strong network influence, which means that more investors are as likely to join the network as more investors use it. This can assist in ensuring that Bitcoin retains its dominance.
3. Security
Bitcoin is the most secure and most reliable cryptocurrency, with its blockchain equipped with a very secure and immutable record of all transactions. This makes it a very attractive option for investors who are seeking safety.
BTC dominance disadvantages
Listed below are some of the disadvantages of BTC dominance:
1. Volatility
Bitcoin is an extremely volatile asset, which means its price can dramatically swing within a brief duration. This can make it extremely difficult to predict its performance in the future, which is unfavorable for investors.
2. Risk of Forking
Bitcoin’s blockchain is very prone to forking, which means that it can be divided into two blockchains. This can be a huge disadvantage for its investors as it may lead to uncertainty and confusion about which version of the divided blockchain is the “real” Bitcoin blockchain.
3. Scalability
Bitcoin’s blockchain is generally less efficient than some other kinds of blockchains in the crypto space, which means that it can take a longer time to process transactions. This can be a major disadvantage for crypto traders who need to make fast trades.
How does BTC dominance affect altcoins?
As stated earlier, Bitcoin dominance is an important metric when comparing different kinds of cryptocurrencies. Generally, Bitcoin is the most dominant and popular cryptocurrency, followed by Ethereum, then other altcoins come subsequently. So how does Bitcoin dominance affect altcoins?
Generally, experts believe that the higher the Bitcoin dominance in the crypto market, the weaker altcoins become, and vice versa.
Usually, when Bitcoin dominance increases in the market, it implies that people are generally investing more money in Bitcoin compared to altcoins. This indicates one of two major things: either BTC’s value is increasing faster than altcoins or it’s plunging slower.
Bitcoin dominance can be used to predict the market condition because it generally responds to investor’s appetite for altcoins. If more people are willing to invest in altcoins, it tends to be unfavorable to Bitcoin dominance.
Is Bitcoin Dominance Good or Bad?
Bitcoin dominance is only a metric that crypto traders and investors can use to manage exposure to risk. You can also use it to evaluate promising projects and make informed trading decisions. However, it is a quite controversial metric. Some people think that Bitcoin dominance was only relevant in the past because only a few cryptocurrencies were in existence by then. They argue that Bitcoin will have less impact on the general crypto market in time.
Nonetheless, Bitcoin dominance is a popular and useful metric, particularly among Bitcoin proponents.
Wrapping up, Bitcoin dominance is a fundamental statistical measurement of the general state of the crypto space and you should not overlook it if you are hoping to invest in altcoins. Bitcoin has a relatively stable status and functions as the preeminent crypto asset. Therefore, estimating its market cap in relation to the market cap of other cryptos lets you understand investors’ behavior and market sentiments.
Gnerally, crypto experts believe that the higher the Bitcoin dominance in the crypto market, the weaker altcoins become, and vice versa. Remember, always consider the key factors that influence BTC dominance. These includesuch as changing market trends, demand, and supply, investor sentiments, etc before you conclude. These factors are also major indicators that can determine what happens to altcoin trends in relation to Bitcoin dominance during that particular time.
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