Bitcoin was the first cryptocurrency launched and conquered the market as a single ultimatum until other coins like Ethereum, Litecoin, etc entered the market. At present, more than 13,000 cryptocurrencies are creating stiff competition against the first and largest cryptocurrency: Bitcoin.
To identify the dominance of Bitcoin in the market, the Bitcoin dominance chart is utilized. What is this chart actually and why are they important? Continue reading the article to learn more about the Bitcoin dominance chart.
What is a Bitcoin Dominance?
Before understanding what a Bitcoin dominance chart is, one needs to have an idea about Bitcoin dominance.
Bitcoin dominance represents Bitcoin’s market share compared to all the other cryptocurrencies in the market. Since the altcoin market has expanded in recent years, the Bitcoin dominance utility has increased further, allowing investors to get an insight into how dominant Bitcoin is in relation to other cryptocurrencies.
Bitcoin dominance showcases the competition between altcoins and Bitcoin and becomes most effective during highly volatile market conditions. An increasing dominance indicates a safe period for Bitcoin, making it a profitable asset, whereas a decreasing dominance suggests the movement of investors towards other cryptocurrencies, creating risk in Bitcoin investments.
What is a Bitcoin Dominance Chart
A Bitcoin dominance chart depicts the visual representation of Bitcoin’s dominance in the market in comparison with other altcoins. By analyzing a Bitcoin dominance chart a user can understand the following;
- An upward Bitcoin dominance indicates a condition of risk aversion. It usually happens when Bitcoin becomes the most dependable crypto during slow market conditions.
- Bitcoin dominance increases the trade of other instruments.
- Since Bitcoins are stable, Bitcoin dominance is inversely related to the total market capitalization.
- Forecasts market reversals.
- Shows the time when the market value of altcoin increases.
Factors Affecting the Bitcoin Dominance
Bitcoin dominance is based on the supply and demand of the BTC coin as well as other coins. If the coin’s demand is higher than other crypto coins the Bitcoin dominance tends to rise. Similarly, demand for other crypto coins declines the sale of Bitcoins, resulting in a reduction in demand.
The factors that affect the supply and demand of Bitcoins include;
1. Bullish and Bearish sentiments
Bullish and bearish trends determine the demand for a coin. A bearish sentiment in the market means that the price of the coin may decline, reducing the demand. A bullish trend indicates the price tends to go high, resulting in an increase in demand. Bitcoin’s dominance either shows an uptrend or a downtrend depending on the sentiments of the market.
2. Increase in demand for altcoins
An increase in demand for altcoins reduces the demand for Bitcoins, resulting in a falling dominance in the chart. While a decline in demand for altcoins increases the Bitcoin trade, creating a rising dominance in the chart. The higher the number of altcoins circulating in the market, the lower the Bitcoin dominance graph.
3. News and Social media
Breaking and exclusive news on crypto coins increases their value and demand in the market. A positive report of Bitcoin increases its dominance score whereas a negative report decreases its dominance.
4. Economic data
The inflation rate, gross domestic production, and unemployment increase the demand for Bitcoins resulting in an uptrend in the dominance chart.
How Bitcoin Dominance Chart be Utilized to Leverage Crypto Trading?
Bitcoin dominance chart can be utilized to determine the market trend and price of the Bitcoin, allowing investors to make a better decision. Let’s check how these two analyses help to leverage crypto trading.
Analyzing the market trend
Bitcoin dominance chart helps to identify the lower highs helping the investors to forecast the market trends.
- A downtrend indicates the reducing dominance of Bitcoin and an increasing value of altcoins. This generally occurs when investors utilize less popular altcoins that offer high potential returns.
- An uptrend shows a gain in the momentum of Bitcoin during bearish or market reversal phases. This is mainly due to the stability of Bitcoins, investors see Bitcoin as a safer and stable asset compared to altcoins, and hence they invest in Bitcoins during market reversal conditions.
Evaluate the market price
Bitcoin dominance and market price help an investor to decide whether to invest in the platform or not. When the price of Bitcoin increases, along with an uptrend in the Bitcoin dominance chart, a bullish trend can be anticipated.
On the other hand, a decline in price inclination with an uptrend showcases an upcoming bearish trend. And if both price and Bitcoin dominance declines, a strong bearish trend awaits.
Limitations of Bitcoin Dominance
- The increasing demand for stablecoins influences Bitcoin dominance, resulting in misinterpretation of Bitcoin’s influence, and reducing their effectiveness.
- Bitcoin dominance does not take into account the utility and adoption of individual tokens. This often results in favoring quantity over quality.
Final Thoughts
Understanding the Bitcoin dominance chart is important for investors as it provides information on Bitcoin’s market and its influence on the entire crypto ecosystem. It gives insight into Bitcoin’s market positions, bullish and bearish trends, and the chances of a market reversal.