Bitcoin’s stellar performance has sparked greater interest in cryptocurrencies, attracting investors from all corners of the world. However, cryptocurrencies remain a new concept, with so many technicalities that can be pretty confusing. For instance, Bitcoin dominance is one of the concepts about crypto that most people do not understand clearly. So, what is Bitcoin dominance, and why is it relevant to crypto users? The following article will answer those questions.
What is Bitcoin Dominance?
Bitcoin dominance is a metric used to calculate Bitcoin’s market capitalization or share of the larger crypto market. Investors and traders mainly use the metric to understand if altcoins’ prices are increasing or decreasing against Bitcoin prices.
- Whenever Bitcoin Dominance goes up, altcoins, on the whole, lose value against Bitcoin.
- Whenever Bitcoin Dominance assumes a downward trend, altcoins, on the whole, gain value against Bitcoin.
The above assumptions mean you should be in Bitcoin whenever Bitcoin Dominance increases and switch to altcoins whenever Bitcoin Dominance is depreciating. A steep and consistent downtrend in dominance often occurs in crypto bull markets because intense bull markets appreciate altcoins capitalization higher than Bitcoin. Similarly, a pullback of such a trend typically signals a bear market.
Implications of the Bitcoin Dominance Index
Leading crypto exchanges such as bitcoin revolution provide charts with Bitcoin dominance and market cycles data on their websites. The information primarily enables investors and traders to understand Bitcoin’s importance in the overall crypto economy. Using the Bitcoin Dominance index can provide insights into the market and what other traders say about Bitcoin.
The index effectively measures the demand for Bitcoin relative to the need for altcoins since any asset’s price is a supply and demand function. As such, traders could use the index to infer the market’s risk aversion. Bitcoin has sometimes served as a haven, offering a solid hedge against economic turmoil. Many investors have termed it digital gold, helping investors avoid huge losses during financial crises.
However, Bitcoin Dominance also has some downsides. For instance, market participants could quickly reduce that measure by developing independent altcoins and holding airdrops. That is a situation whereby the members of that crypto and blockchain community receive units free of charge.
Some analysts have also criticized the importance of market capitalization, highlighting its limitations. Market cap refers to the number of units of particular security multiplied by its price. For example, if Company X has 1 million outstanding shares, trading for US$50 per piece, that company’s market cap is US$50 million. Investors can get a quick read of a company’s worth by harnessing that measure.
Similarly, investors can also use that measure to understand a digital currency’s market cap better. However, using the market value that way has some limitations. For instance, Significant Bitcoin reserves lie dormant, either abandoned or stored in wallets that no one can access due to the loss of private keys.
An analyst reported in 2014 that about 30% of all Bitcoin tokens had been lying dormant for over twelve months. Although those coins are part of the market cap index, they are inaccessible. Besides, many altcoins have diminished because the developers never delivered them or were scams. That further complicates the efforts at using the Bitcoin Dominance index effectively.
The Bitcoin Dominance Index acts as a metric that enables investors and traders to get a quick sense of Bitcoin’s value relative to other cryptocurrencies. Its primary goal was to illustrate Bitcoin’s pivotal role in the overall crypto world. Although it can offer valuable information to investors, the index also bears some limitations to keep in mind, as discussed above.
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