How to trade altcoins using bitcoin dominance?
Bitcoin dominance can directly affect altcoins by showing BTC market trading volume relative to altcoins.
Bitcoin (BTC) is both the world’s first and largest cryptocurrency in terms of market capitalization as well as trading volume. These factors are quite important, considering that all cryptocurrencies trade against Bitcoin, and the dominance of BTC can actually serve as a valuable indicator when trading all different types of cryptocurrencies.
This article will offer an overview of how to trade cryptocurrency while using the Bitcoin Dominance Indicator and how to read the Bitcoin Dominance Index chart as a whole.
What is Bitcoin Dominance?
The dominance of Bitcoin is discovered by comparing the market capitalization of Bitcoin to the capitalization of the entire crypto market. The higher the Bitcoin market cap, the more Bitcoin dominance is at stake, and we have the answer to the question: What percentage of the cryptocurrency market is Bitcoin?
Bitcoin Dominance = Bitcoin Market Cap / Total Crypto Market Cap
The chart presents these numbers in a clear percentage format where one can take a quick look and understand if the BTC dominance is at 40% or 60%, for example.
That said, users can also check out the Real Bitcoin Dominance Index, which calculates the dominance of Bitcoin only against proof-of-work (PoW) coins aiming to become a form of currency.
The logic behind the Real Bitcoin Dominance Index is that many altcoins such as stablecoins do not aim to compete with BTC and therefore this may give a more realistic long-term view of Bitcoin dominance.
This indicator even gives users the option to exclude Ethereumas it is debatable whether Ether (ETH) is meant to be a currency rather than a utility token.
How Does Bitcoin Dominance Affect Altcoins?
Bitcoin dominance can directly affect altcoins, as it shows the share of market trading volume in BTC compared to the share of trading volume in altcoins.
Typically, if Bitcoin dominance is on the rise, traders recommend that one have more of their crypto holdings in Bitcoin than in altcoins. If BTC dominance is down, traders recommend holding more altcoins than Bitcoin.
While it is wrong to say that Bitcoin dominance is an accurate representation of a bear or bull market, there are correlations between these definitions. For example, bull markets could lead to less dominance of BTC, as funds usually flow into altcoins at this time.
Conversely, bear markets could see greater dominance of BTC as traders may withdraw their funds from altcoins and invest money in Bitcoin as it is more of a reliable asset.
Some enthusiasts might say that Bitcoin’s less dominance is a good thing because it means the cryptocurrency market is booming and funds are flowing into all sorts of projects instead of just Bitcoin. But, it should also be noted that the total cryptocurrency market capitalization will take into account pre-mined and forked coins, which means that the number of altcoins could be artificially inflated.
It should also be taken into account that the dominance of Bitcoin can decrease even when the price of the asset increases. This can happen when money pours into the cryptocurrency market with Bitcoin included, although more money can be moved into altcoins than the largest cryptocurrency in the world.
The thing is, while BTC’s dominance may paint the crypto market in some surface-level way, there are various factors to consider in order to gather an informed view.
Sometimes dominance can be down due to a short-term altcoin boom, while other times the entire market can lose money. It is always best to do additional research before making an investment decision.
How to Trade Bitcoin Dominance?
There are several factors to consider when attempting to trade Bitcoin dominance. First, understand that Bitcoin dominance can decrease if interest is high for even a single altcoin. This interest in a single altcoin does not mean that every altcoin will experience upward trends. The market may take some time to correct.
It is also best to consider the intent of some popular altcoins and whether or not that intent will result in a lasting impact on the altcoin market. For example, we might see a stablecoin experiencing a significant increase in volume at the moment.
However, users can invest in said stablecoin just to transfer those funds to Bitcoin, as stablecoins can be an easy way to inject funds into the cryptocurrency industry.
As a result of this activity, Bitcoin dominance could quickly drop and rebound, negatively impacting short-term trading. Another factor that could lead to unpredictable short-term dips or increases in Bitcoin dominance is fear of missing out (FOMO).
New parts are coming into the game all the time. cryptocurrency market. Some of these new altcoins entering the market generate a ton of hype that results in hundreds of thousands of dollars pouring into the altcoin side of things and disproportionately reducing Bitcoin’s dominance.
However, many new altcoin projects often lose their hype or even end up being a scam, forcing users to withdraw their holdings as quickly as they grab them. In this case, the dominance of Bitcoin could return to its original place.
You also have to consider the extremes of Bitcoin’s dominance ratio. For example, Bitcoin’s dominance was over 90% before altcoins entered the market. However, enthusiasts note that the dominance of Bitcoin is unexpected to reach this number again due to the prevalence of altcoins in the current market. But, it is impossible to say for sure, as if countries are following El Salvador to implement Bitcoin, as the dominance of BTC legal tender may increase again.
In fact, Bitcoin dominance is much more likely to hit new lows than new highs as altcoin projects continue to gain mainstream popularity.
Accordingly, traders should note when Bitcoin dominance is trending towards an all-time high, as this could mark a good threshold in which BTC dominance could see resistance. Conversely, users should keep an eye on the dominance of BTC reaching new lows and the reaction of the altcoin market accordingly.
What happens when Bitcoin price dips?
Bitcoin’s price drop could mean reduced dominance as users move funds from BTC to other altcoins, but a price drop may also have little to do with overall dominance. If Bitcoin dominance drops, users can definitely expect a bull run from altcoin and can trade accordingly.
That said, a drop in the price of Bitcoin could occur if users withdraw funds from all cryptocurrencies, which would lead to an overall drop in the crypto’s market capitalization. In this case, Bitcoin dominance may remain at a certain percentage despite traders anticipating a potential bear market.
This example is a vital reminder that Bitcoin dominance should not be the only tool at a trader’s disposal, but rather one of many to consider before making a trade.
The Impact of a Bitcoin Price Crash on the Cryptocurrency Market
Dominance aside, a major Bitcoin price crash has often led to a general market crash, although there are few exceptions. This correlation between Bitcoin and a stock market crash is simply due to the fact that Bitcoin is the number one cryptocurrency in the world and all crypto assets trade against it.
Look at it this way: if a country plans to ban Bitcoin and the price drops significantly as a result, traders and speculators could also lose faith in altcoins and withdraw their funds from these alternative investments.
That said, a Bitcoin crash does not always mean an overall market crash. There are several occasions where Bitcoin experiences a significant price drop while Ethereum remains more stable. It is important to remember that different assets serve different purposes and the downtrend of one may not correlate with the downtrend of another.
In fact, as time passes and altcoins enter mainstream consciousness, future Bitcoin crashes may have less and less effect on the overall market. Bitcoin’s dominance matters now because it’s still the most popular cryptocurrency in the world. If other coins start pulling this mantra out of Bitcoin, dominance will matter less and less.
By Max Moeller, Cointelegraph
Max is a cryptocurrency journalist with an affinity for gaming and emerging technologies. After leaving school to start a career as a writer, he wrote his first blockchain article and fell down the rabbit hole. Max has been published in various blockchain and crypto-related magazines, doing his best to educate everyone about this burgeoning technology.
The opinions expressed here are solely those of the author and do not necessarily reflect the views of Forex Quebec. Every investment and trading move involves risk, you should do your own research when making a decision.
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