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Investing in cryptocurrencies can be risky due to their extreme volatility. Traders and investors develop various tools and utilize specific indicators to track market movements and make the best trading decisions.

One of these instruments is the “Bitcoin dominance index.”

The Bitcoin Dominance Index simplifies the process of analyzing various market conditions and determining which trend between Bitcoin and other cryptocurrencies is the most important.

This article explores the concept of Bitcoin dominance, the factors influencing it, and how it affects crypto trading.

What is Bitcoin?

Bitcoin is the first cryptocurrency based on the Proof-of-Work blockchain, and it was created by Satoshi Nakamoto. Satoshi Nakamoto’s identity as the creator of Bitcoin is shrouded in mystery. Nobody knows for sure who the founder is or if they are a group of people.

On October 31st, 2008, Satoshi Nakamoto published a paper containing their thoughts on a then-strange means of payment called Bitcoin.

Nakamoto decided to launch the bitcoin network on January 9th, 2009. He corresponded with Mr. Hal Finney, a cryptographer, about the development of the network, and both parties initiated the first transaction on the chain. The goal of Bitcoin was to create a peer-to-peer payment system.

What is BTC Dominance?

Bitcoin dominance (also known as BTC dominance) refers to the percentage of the total value of all cryptocurrencies that Bitcoin makes up. Its central premise is that the value of altcoins will drop as BTC’s dominance increases. Alternately, if BTC’s dominance declines, the value of altcoins will rise.

The term “BTC dominance” refers to both the BTC dominance ratio and the BTC dominance index.

By comparing the total market capitalization of Bitcoin to the total market capitalization of all other cryptocurrencies, one can get a sense of how dominant Bitcoin is.

Bitcoin dominance ratio = Bitcoin market cap/Total cryptocurrency market cap

Cryptocurrency market capitalization refers to the overall market value of cryptocurrencies. It is calculated by dividing the number of coins in circulation by the current value of the coins.

The value of a crypto token can be determined by factors other than its price. Investors use market capitalization to compare the value of various cryptocurrencies. A cryptocurrency’s market capitalization is an important indicator of how much its price may rise and whether it is safe to buy compared to others.

How Does BTC Dominance Work and Why is it Important?

BTC dominance can aid in understanding the trends of bitcoin and altcoins. It informs traders and investors whether other cryptocurrencies are rising or falling in relation to Bitcoin.

As BTC’s dominance grows, altcoins lose value in comparison to BTC. Also, as BTC’s dominance declines, the value of altcoins as a whole rises relative to BTC.

As a result, it is best to invest in bitcoin when Bitcoin Dominance is increasing and in altcoins (such as large caps, mid-caps, low caps, ETH, and many others) when Bitcoin Dominance is falling.

In bull markets, a steep and steady decline in dominance typically occurs due to the tendency of ferocious bull markets to drive altcoin capitalizations higher than Bitcoin. A reversal of this pattern is observed in a bear crypto market.

Factors Affecting Bitcoin Dominance

Changes in Trends

Before the rise of alternative cryptocurrencies, BTC dominance used to exceed 90%. While Bitcoin lost some of its nearly unrivalled attention to other assets with more significant price swings and projects touting new intriguing use cases, altcoins as a whole attracted more user and investor interest.

Bitcoin was developed to alter how value is transferred, but cryptocurrency projects have advanced to do more. Unlike bitcoin, numerous altcoins are utilized in various industries, such as art, gaming, and DeFi services, in addition to money transfers. A particular type of cryptocurrency project might attract more attention and trade depending on the current trend. For example, the rise of NFTs may have caused BTC to cede some of its dominance to tokens linked to NFTs.

BTC dominance may be influenced by traders’ desire for more pronounced price fluctuations and the associated profit opportunities that some newer altcoins provide, which may cause money to flow into riskier assets. The industries these alternative coins represent in this situation may not matter as much as the possible rewards.

Bear or Bull Market

Stablecoins have become increasingly popular over the past few years, putting persistent pressure on BTC dominance. More specifically, stablecoins are frequently used to safeguard crypto investors’ funds in the face of declining values during bear markets or other periods of instability. BTC dominance may wane as money leaves the BTC market and goes into stablecoins.

The opposite of this scenario plays out in a bull market. When the market is strong, traders may be tempted to move funds from stablecoins to more volatile assets with huge trading potential, such as bitcoin. However, the overall effects of a healthy market on bitcoin dominance are highly dependent on the circumstances.

This is because confident traders may take more risks and invest in more volatile altcoins than BTC.

On-Ramping Through Stablecoins

Compared to using money, stablecoins provide a practical means to access a range of cryptocurrencies. This is because although gateway exchanges that convert fiat currency into cryptocurrencies exist, they can be limited, only providing the more well-known cryptocurrencies and stablecoins. But crypto-to-crypto exchanges often have a wider range of cryptocurrencies that can be traded with certain stablecoins.

So, those looking to trade a particular cryptocurrency can do so using stablecoins. Naturally, the total value of the cryptocurrency market will go up if a lot of new money comes in through stablecoins instead of bitcoin, making bitcoin less dominant.

The Introduction of New Coins

When new coins enter the market, their popularity can skyrocket, undermining BTC’s dominance. Because bitcoin competes with every other cryptocurrency on the market, the simultaneous rise of a slew of well-known altcoins could impact it.

These altcoins may become less popular after the initial excitement wears off. If this occurs, and money flows from these altcoins to BTC or out of the cryptocurrency market, BTC may reclaim its dominance.

How to Trade Using BTC Dominance

There are numerous factors to consider when attempting to trade Bitcoin dominance. To begin, keep in mind that even a single cryptocurrency with considerable demand can cause Bitcoin dominance to wane. This interest in one altcoin does not imply that other altcoins will grow in value. The market may take some time to stabilize.

It’s also a good idea to consider the intentions of certain popular cryptocurrencies and whether or not those intentions will have a long-term impact on the altcoin market.

A stablecoin, for example, may temporarily witness a significant increase in volume. However, because stablecoins can be a simple way to enter the cryptocurrency market, consumers may invest in said stablecoin solely to transfer funds to Bitcoin.

This behaviour may cause Bitcoin dominance to fluctuate rapidly, adversely affecting short-term trades.

Another factor that can cause short-term swings in Bitcoin dominance is the fear of missing out (FOMO). The cryptocurrency market consistently records an influx of new coins. Some of the new altcoins that are entering the market create a lot of buzz, which attracts a lot of money to altcoins while reducing Bitcoin’s dominance disproportionately.

Many new cryptocurrency projects, however, frequently fail to live up to their expectations or even turn out to be scams, forcing consumers to withdraw their holdings as quickly as they put them in. In such cases, Bitcoin could reclaim its former dominance.

The extremes of the Bitcoin dominance ratio should also be taken into account. For instance, Bitcoin’s market share was above 90% before altcoins entered the market. However, it is unlikely for Bitcoin’s dominance to reach that level again due to the presence of altcoins in the current market.

But it’s impossible to say for sure because BTC might regain its supremacy if other nations adopt Bitcoin as legal tender, just like El Salvador did.

As more people continue to show interest in altcoin projects, Bitcoin’s dominance will likely decline.

Consequently, traders should note that whenever Bitcoin dominance is heading toward a record high, this could indicate a good point at which Bitcoin dominance may encounter resistance. On the other hand, consumers should pay attention to how the altcoin market responds as BTC dominance sinks to new lows.

Should Traders Depend on BTC Dominance When Trading?

The Bitcoin dominance ratio remains one of the most important trading tools. Still, it isn’t a universally applicable solution to all trade problems.

It is similar to the Fear and Greed Index in that it is simply a meter that shows how the market is currently acting and how it views Bitcoin or other cryptocurrencies. It does so in an easy-to-understand manner while providing an accurate representation of market behaviour.

In Conclusion,

The Bitcoin dominance indicator can be used to manage risk exposure, identify exciting potential investments, and decide how to balance a portfolio.
Some argue that Bitcoin’s dominance in the past was only significant because very few cryptocurrencies were available. They contend that Bitcoin will eventually have less impact on the market.
However, Bitcoin dominance is a popular tool among Bitcoin proponents. When BTC dominance is used correctly, it can provide useful information about trends affecting the entire cryptocurrency market.

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