What is Bitcoin (BTC) Dominance and Why Does It Matter?
What is Bitcoin?
Bitcoin is a digital currency which was introduced in 2009. It is issued from a distributed ledger network of the eponymous title. Bitcoin blockchain is the first ever decentralized DLT that allows users to make global transactions without using a centralized banking network or third-party payment options. Bitcoin is a trusted and permissioned network.
It means that people can make verified transactions on the network without worrying about duplication or unwarranted changes. At the same time, everyone can participate in Bitcoin governance in terms of mining, making transactions, or becoming a node.
Bitcoin is also an open-sourced network meaning that developers can access and utilize its source code. On this account, Bitcoin has led to the creation of various blockchains and altcoins.
What is Bitcoin Dominance?
It is important to note that market capitalization is a metric that determines the overall value of a given network. It is measured as the product of the total circulatory supply of a given cryptocurrency and per unit spot price. Every cryptocurrency that is traded on the spot market has a price movement chart and a market cap.
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Cryptocurrency investors can arrange various digital currencies in the market in terms of their market cap. Bitcoin being the first-ever digital currency has retained the highest market cap to date. This phenomenon is called Bitcoin dominance.
Bitcoin dominance postulates that the Bitcoin market cap makes up the majority portion of the overall digital currency market cap. Here is a formula to calculate Bitcoin dominance mentioned below:
Bitcoin Dominance = BTC market cap / Altcoin market cap
How does Bitcoin Dominance Work?
Bitcoin is the most popular digital currency around the globe. When it was first introduced, it was limited to a secluded circle of tech experts. However, during the last 12 years, Bitcoin dominance has increased to a global scale and Bitcoin market cap has reached a value of over $1.1 trillion during the Bull Run.
According to the cryptocurrency price history charts, Bitcoin market cap has retained the majority portion of overall altcoin market cap. However, there are some factors that can impact Bitcoin dominance mentioned as under:
Price Trends
Bitcoin dominance stayed at 90% before the introduction of altcoins. However, with time investors started to diversify their portfolios with other digital currencies. On this account, the total market share of Bitcoin was distributed. Investors can invest in a new altcoin based on its utility or unique features such as smart contracts etc.
At the same time, some altcoins hail from different industries and professions such as gaming, virtual real estate, supply chain, and others. However, investors have continued to invest in Bitcoin on account of its stability and recurring economic cycles.
On this account, investors often term Bitcoin as digital gold and add it in their portfolios as hedge against inflation.
Bull and Bear Markets
The digital currency market goes through bear and bull market runs. A bear market is a time when the overall price volatility for cryptocurrencies increases. On the other hand, Bull market is a period characterized by positive price movement.
During a bear market, investors are likely to convert their Bitcoin positions into other assets such as stablecoins, altcoins, or fiat currencies to prevent loss of their investment. This can lead to decline in Bitcoin dominance. However, Bitcoin dominance increases during Bull Runs.
Stablecoins
Stablecoins are the type of digital currencies that have a fixed market value at all times. Stablecoins are backed by other assets such as cryptocurrencies, commodities, and fiat currencies etc to retain their overall value.
Digital currency investors use stablecoin to add more liquidity for their investment since it is easier to convert a digital currency into stablecoin rather than fiat currencies.
At the same time, the fixed value of stablecoin ensures allow investors to preserve the overall value of their investment in real time.
When the market sentiment turns negative and investors have an expectation of price devaluation, it means that investors can start converting their Bitcoin reserves into stablecoins to retain its value.
Such an event leads to a decrease in Bitcoin dominance which is recovered during positive market development.
New Altcoins
There are thousands of cryptocurrencies in the digital currency market. Every new digital coin has a unique utility and feature that compels investors to add it to their portfolio as diversification or possible price appreciation. In this manner, the arrival of new altcoins can dilute Bitcoin’s dominance.
Conclusion
Bitcoin dominance is a useful metric that investors can use to their advantage by using options such as Wyckoff method and altcoin season. In this manner, investors can understand the market dynamics and spot the best duration to create and/or dissolve new Bitcoin positions.
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