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What is Bitcoin Dominance? A Beginner’s Guide

Introduction

As the hype of crypto trading is increasing with time, investors are always looking forward to finding out new trends in the financial market that could help them analyze the market conditions in a better way.

The traders observed certain repeating patterns in the market that were caused by the influence of Bitcoin on the overall market condition.

The tool named Bitcoin Dominance has been discovered by market experts that would help them to find out the difference between the conditions and prices of all the coins in the market as compared to Bitcoin.

Here is a detailed guide article that will explain the concept of Bitcoin Dominance and its importance to the readers, and how it works in the market.

What is Bitcoin Dominance?

The ratio between the capitalization of Bitcoin in the market and the total capital of the entire cryptocurrency market is known as the Bitcoin Dominance ratio. This ratio helps the traders to understand the trend of Bitcoin trading in the market and also to explore the present opportunities.

Bitcoin Dominance helps in analyzing the trends of the altcoins, whether they are moving in an upward direction or downward one.

This can be understood as if the value of Bitcoin Dominance is increasing; this means that all the altcoins in the market are collectively losing their value against Bitcoin.

On the other hand, if Bitcoin Dominance decreases, it can be understood that the value of altcoins in the market is going up as compared to the value of Bitcoin.

At different time frames and market situations, Bitcoin Dominance can have different implications. Therefore, it is important for traders to learn to analyze the Bitcoin Dominance chart.

What is Crypto Market Capitalization?

Market Capitalization, normally referred to as a market cap, is the collective value of all the coins that have been mined to date when it comes to cryptocurrency. The concept of market capitalization is very important to be understood to understand the working of Bitcoin Dominance.

In order to calculate the market cap, one has to multiply the number of coins that are circulating in the market at that time by the market price of one coin in the market. It helps the investors determine the value of the Bitcoin network, if it is the right time to invest or if the value may increase in the near future.

In addition to the price of the crypto coins, one can determine the number of coins that exist in the market, and this is considered one of the biggest benefits of dealing with the crypto market. Then a graph is plotted on the chart after simply calculating the market cap of the complete crypto market.

What is the Relation Between Bitcoin Dominance and Market Capitalization?

In order to calculate Bitcoin’s Dominance, the market cap of Bitcoin is divided by the total market cap of all the cryptocurrencies.

As Bitcoin is considered the most dominant cryptocurrency in the market and its influence can be seen over the complete market, therefore it can be deduced that the shape and direction of the graph of the total cap in the market are usually the same as the Bitcoin behaviour.

What is Bitcoin Dominance Chart?

When the capitalization of Bitcoin in the market is compared with the capitalization of the entire market, Bitcoin Dominance can be calculated. Bitcoin Dominance comes out to be more if the bitcoin capital in the market is increasing.

Using the Bitcoin Dominance chart, traders are able to get an idea of the trend going on in the market in the form of a simple percentage.

The real Bitcoin Dominance chart can also be viewed by the users to calculate the dominance of the bitcoins existing in the market with respect to the coins using the Proof of Work protocol that are mainly going to become the dominant currencies in the market. Ethereum is also excluded by using the indicator of Bitcoin’s Dominance in the market.

Traders who are able to read and study the Bitcoin Dominance chart can gain a lot of benefits. They can easily predict when the market is going to follow the trend of a bull market or a bear market. Moreover, it helps in the prediction of an altcoin boom, giving an indication of a new altcoin season.

The reverse patterns of market trends can easily be predicted too. In addition to that, Bitcoin Dominance can also help in the prediction of the price consolidation phase that may occur only for a short period of time.

Factors Impacting the Bitcoin Dominance

There are a number of factors in the financial market that can affect the value of Bitcoin’s Dominance in the market. Some of those dominating factors are mentioned below.

Bitcoin Value

The market dominance of Bitcoin goes up as the value of Bitcoin increases in the market. This means that the value of Bitcoin and Bitcoin Dominance has a direct relationship with each other. The value of Bitcoin Dominance was almost near 90% when the altcoins were not very dominant in the market.

However, as soon as financial services, gaming processes powered by blockchain technology, and art started becoming popular in the market, the scenario started changing.

Therefore, the value of Bitcoin Dominance goes down every time any new advancement happens in the market that introduces any new kinds of tokens that could help make the crypto trade easier.

If the value of the cryptocurrency keeps on increasing in value, this is the only reason why the value of Bitcoin Dominance can be kept stable. The price may differ from time to time and may not be representative of Bitcoin’s Dominance every time.

Altcoins

As it is already mentioned that the value of Bitcoin Dominance is affected every time when a new coin is introduced in the market. In the crypto market, there are more than 20,000 assets that are circulating.

People keep on conducting experiments with many other things that are based on the hype, sentiments of the society, fundamentals and the shilling extent.

But one should not forget that no matter what the scenario is, the comparison is always made between Bitcoin and other assets. In case the money starts moving to the domains of other cryptocurrencies, the value of Bitcoin Dominance may get affected in the market. 

Popularity of Stablecoins

Bitcoin was mainly considered creating a peer-to-peer interaction since its inception. However, the after the discovery of stablecoins, this responsibility was shifted on their part, which also helped to ramp the crypto investors towards the exchanges.

This resulted in the dilution of Bitcoin’s Dominance in the market after the uprise of stablecoins. At present, the stablecoins such as BUSD, USDC and USDT are making their prominent position in the market, giving tough competition to Bitcoin Dominance.

Market Conditions

Bitcoin Dominance can also be greatly affected by the nature of the market. The graph of Bitcoin Dominance may rise significantly if there is a bear market going on. This can still happen in the market even if the Bitcoin value or the market cap as a whole is going down.

This impact is due to the reason that Bitcoin actually rules the crypto market and is considered one of the major crypto assets.

One can refer to the term Bitcoin stability in the context that even if the whole market cap is towards a decline, the value of the altcoins is affected more because of their volatile nature, and this results in the increase in Bitcoin Dominance.

On the other hand, if there is a bull market, this may result in a decrease in Bitcoin’s Dominance in the market. This is due to the reason that people become more confident in investing the altcoins though they are a lot riskier.

The Emergence of New Coins

The introduction of any new coin in the market may result in a decrease in the popularity of Bitcoin and hence in Bitcoin Dominance. The rivalry of Bitcoin is considered with each and every coin in the market; therefore, the emergence of many altcoins or any coin may decrease the hype of Bitcoin significantly.

To overcome this situation, the funds are then transferred into Bitcoins instead of altcoins, which causes Bitcoin Dominance to rise again.

How is Bitcoin Dominance Used in Trading?

There are a number of methods that could be adapted to consume Bitcoin Dominance in the trading processes. Some of them are mentioned below.

To Spot the Altcoin Season

As the number of altcoins in the market increase, it is obvious that the value of Bitcoin will be diluted in the market. Some of the altcoins have gained more popularity in the financial market in recent past years.

Due to this, the value of altcoins increased more than the value of Bitcoins in the market. During the period when the value of altcoins is significantly more than the Bitcoins is known as Altcoin Season in the market or simply alt season.

According to the Wyckoff method, this is a cyclic process, and the rotation between altcoin and Bitcoin is continuous. During the altcoin season, Bitcoin Dominance may decrease, and the altcoins are performing better in the market during that phase.

Traders usually monitor the graph of Bitcoin Dominance before investing in them and are used to dealing with trading in Bitcoins and altcoins and build their trading profiles accordingly.

With the Present Bitcoin Price

In addition to observing Bitcoin’s Dominance in the market, the price of Bitcoin is also observed in the market before making any decision regarding trade.

The experts found a number of combinations by experimenting with Bitcoin Dominance and the price of Bitcoin while trading in the market.

There is a possibility that the Bitcoin bull market is approaching in the crypto space if the traders observe that Bitcoin Dominance and the price of Bitcoin is increasing in the market.

On the other hand, it could be the indicator of the approach of the altcoin bull market if the Bitcoin Dominance is going down and the price of bitcoin is increasing in the market.

In the same way, it could be a signal of an altcoin bear market if Bitcoin Dominance is increasing and the price of Bitcoin is falling in the market.

However, the whole crypto market may be on the verge of downfall if the decline in both Bitcoin Dominance and the price of Bitcoin is observed.

Wyckoff Method

The Wyckoff method was discovered in the year 1930, and since then, traders and investors have been using it as a tool to analyze the conditions of the financial market.

By using the value of Bitcoin Dominance, they can apply the laws existing in the market, such as the law of cause and effect. This helps them to find out the opportunities in the market from where they can get potential profit.

The trend existing in the market, the upcoming trend, the reversal of a trend etc., can be predicted by the traders and investors by using the Wyckoff method.

Moreover, the traders can also predict the time trades using this method. The Wyckoff method states that the trading procedure is comprised of four distinct phases. These phases are accumulation, markup, distribution and markdown.

The direction of the flow of funds is very important for the traders who trade, being dependent on the timing of the market. In order to pick up the stronger trend being followed, traders carrying diverse portfolios may use this approach.

Effect of Bitcoin Dominance on Altcoins

Altcoins can be directly affected by Bitcoin Dominance as the volume of Bitcoin can be predicted as compared to the other coins in the market.

The traders will have more of their funds in the form of altcoins in case Bitcoin Dominance increases in the market. However, if Bitcoin’s Dominance is decreasing, the traders start storing their funds in altcoins.

It is also to be kept in mind that Bitcoin Dominance should not be considered the factor in determining the bear or bull market. When the funds are being converted into altcoins, there may be a bull market approaching that may lead to lowering Bitcoin’s Dominance.

On the other hand, if there comes a bear market, the traders start shifting their funds into Bitcoins as they are more reliable than the other coins and the value of Bitcoin Dominance increases.

Some of the experts present their view that if the value of Bitcoin Dominance goes down in the market, the funds are stored in the form of other coins or altcoins in the market, which may result in the circulation of coins in the market. However, there is also a risk that the value of altcoins is inflated in the market in an artificial manner.

In case the price of the asset increases, this may result in a decrease in Bitcoin Dominance. This can be understood as when in a crypto market, the funds are being transferred, but more of them may start flowing out of the market in the form of altcoins instead of Bitcoins.

It is always important to keep in mind that there are certain factors to get an informed point of view. There may occur a bloom in the altcoins in the market for a short period of time, while in some situations, the entire market may fall short of money.

Therefore, it is always suggested while dealing with crypto assets and funds to carry out research on their own before making any investment.

Can Bitcoin Dominance be Used as a Standard Indicator?

The ongoing trend in the market can be easily understood by studying the value of Bitcoin’s Dominance in the market. The traders can get an idea about the changing trends and then plot their strategies accordingly.

But is not confirmed that the altcoins and bitcoins will move in the market as predicted by the graph of Bitcoin Dominance. Therefore, similar to many other indicators and predictors in the market, Bitcoin Dominance should also be used as a standard indicator.

The significance of Bitcoin Dominance may lose its value in the market as the number of altcoins increases in the financial market. But till it happens in the future, market trends and trading opportunities can be predicted conveniently using Bitcoin Dominance.

Conclusion

In order to keep a check on the changing trends in the market, traders use the tool of Bitcoin Dominance. It is used by some investors to make their trade profiles better and by some of them to use the strategies and techniques involved in trade in a better way.

However, it is very important to be kept in mind that it is not mandatory that the market will behave in the same way as predicted by Bitcoin Dominance. It is just considered a guideline for the traders to help them chalk out their trading strategies accordingly.


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Hassan Mehmood (Saudi Arabia)

Hassan is currently working as a news reporter for Tokenhell. He is a professional content writer with 2 years of experience. He has a degree in journalism.

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