As the number of cryptocurrencies are increasing day by day, traders are always on the look out for new trends that might help them in identifying emerging patterns for profitable trading.
The Bitcoin dominance ratio is a statistic that is used by traders to aid them in identifying market conditions for Bitcoin and other cryptocurrencies. This is done so that traders may take more informed trading decisions.
If you utilize Bitcoin (or BTC) dominance correctly, it may be possible for you to determine if trading other cryptocurrencies is a better than trading Bitcoin. Traders use the terms “Bitcoin dominance,” “Bitcoin dominance ratio,” and “Bitcoin dominance index” interchangeably.
Learning about Bitcoin Dominance is a great starting point for your cryptocurrency trading journey. However, we will recommend not to start trading before learning all the fundamentals first. In case you can’t find the time or find understanding these indicators too challenging than fear not, we are here to offer help.
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Lets get back to the article. In this article we will explain the concept of Bitcoin dominance, as well as its inner workings and its importance in the crypto world. So lets dig in!
What is Market Capitalization?
Because market capitalization and the notion of BTC dominance are intertwined, it is vital to get an understanding of market capitalization before attempting to deal with the former.
When discussing cryptocurrencies like Bitcoin, the term “market capitalization” (often abbreviated as “market cap”) refers to the aggregate worth of all of the coins that have been created up to this point. The market capitalization may be determined by multiplying the number of coins already in existence by the cost of a single coin on the market at the moment.
The entire supply of a cryptocurrency multiplied by its current price gives the market cap of that coin. As given in the below formula.
Market cap = price of the cryptocurrency x total circulating supply
The ease with which one can ascertain both the total number of coins that have been issued and their current market value is one of the primary attractions of cryptocurrencies. As a consequence of this, locating the total market cap of the whole cryptocurrency market and graphing it on a chart is a relatively straightforward process.
What is Bitcoin Dominance & How does it work?
The term “Bitcoin Dominance” refers to the percentage of the overall cryptocurrency market capitalization that is held in Bitcoin. It may assist you in comprehending the trend of BTC as well as alternative cryptocurrencies. The most essential aspect of Bitcoin Dominance is that it may illuminate for you whether altcoins are now experiencing a downward trend or an upward trend in comparison to BTC.
Bitcoin is by far the greatest powerful crypto in the world according to its market capitalization, and it commands a sizeable percentage of the trading activity as well as the attention that is focused on the cryptocurrency markets.
The total market cap value of the cryptocurrency market is obtained by aggregating the cumulative market capitalizations of all current cryptocurrencies. This yields the total market cap assessment of the cryptocurrency market. When this step is complete, we will be able to come to a conclusion on the overall market capitalization of the cryptocurrency sector.
As a consequence of this, the degree to which Bitcoin dominates the cryptocurrency market is measured by comparing Bitcoin’s market cap to that of the other cryptocurrency markets.
Impact of BTC dominance
Bitcoin was the most prominent cryptocurrency for many years, but its dominance was considerably higher than it is today. Bitcoin’s dominance, on the other hand, started to wane as more and more cryptocurrencies entered the market.
This might most likely be attributable to the surge in popularity of initial coin offers (ICOs), which caused a significant decrease in BTC supremacy, after the launch of Ethereum and the ERC-20 token standard.
It may come as a surprise, but Bitcoin’s market share is regularly affected by what is known as “alt seasons.” During these periods, other cryptocurrencies gain market share compared to Bitcoin, reducing Bitcoin’s market share. On the other hand, given that the phrase “Bitcoin domination” refers to a ratio rather than an absolute, rather than constantly being immediately influenced by rising or falling market prices.
This indicates that Bitcoin’s dominance in the cryptocurrency market is likely to stay the same even if the price of Bitcoin drops and the price of other cryptocurrencies decline at the same pace. At a time when it was the only cryptocurrency that could be exchanged on exchanges, Bitcoin had an almost unrivaled position in the market.
Despite this, Bitcoin’s domination of the cryptocurrency market is no longer 100 percent; nonetheless, this is neither a good nor a negative thing since additional cryptocurrencies are joining the market. It is only a tool that will assist us in developing a deeper comprehension of how the crypto space is developing and growing.
Factors influencing BTC dominance
When cryptocurrencies first emerged, Bitcoin commanded as much as a 95% share of the market since there were so few altcoins to entice investors. Bitcoin’s dominance, on the other hand, started to slip as more people became interested in alternative cryptocurrencies.
When the initial coin offering (ICO) craze erupted in 2017, for example, investment in other cryptocurrencies soared, and Bitcoin’s share of the market dipped to a low of 35 percent.
The year 2018 saw the failure of numerous of these other cryptocurrencies, which resulted in Bitcoin’s market share increasing to about 70 percent.
As a result of adverse news on Bitcoin’s energy usage and China’s ban on Bitcoin mining, both of which strained investment, Bitcoin’s dominance began to depreciate once again in 2021. At the same time, interest in altcoins soared in response to this news.
If we look at the formula that sets the Bitcoin dominance ratio, we will see that it takes into account the two criteria listed below:
- The whole value of Bitcoin’s market capitalization
- The total worth of all cryptocurrencies on the market as a whole.
The Bitcoin dominance ratio is significantly influenced by these two factors in a major way.
What is the importance of Bitcoin Dominance?
First and foremost, this demonstrates that bitcoin maintains its position as the most valuable cryptocurrency. As the cryptocurrency that is both the most well-known and the most actively traded, its market cap is, unsurprisingly, the highest.
Bitcoin dominance is significant because it provides us with an indication of the degree to which bitcoin is influenced by the cryptocurrency industry. A high bitcoin dominance indicates that bitcoin has a greater level of influence compared to other cryptocurrencies. Depending on how you look at it, this might be a good or a terrible thing.
A high bitcoin dominance is favorable for investors in bitcoin since it indicates that bitcoin’s value is more likely to increase in conjunction with an increase in the value of the cryptocurrency market as a whole. A low bitcoin dominance, on the other hand, indicates that bitcoin is less important and, as a result, more volatile.
Conclusion
The Bitcoin Dominance is a great tool that may assist in casting insights on how the cycles of the market are changing. Some investors use it to change their trading tactics, whereas others use to manage their varied portfolios.
Bitcoin Dominance may, of course, have varied ramifications on different time frames; nevertheless, in the end, it is simply one tool in the arsenal that is available to traders.
