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January 27, 2025

Bitcoin Dominance Rises: The Effects on Altcoins

Bitcoin Dominance Rises: The Effects on Altcoins

Bitcoin’s dominance in the cryptocurrency market has taken a notable leap this month, climbing from 54% to 59.48% according to Glassnode data. This pattern echoes the 2020 cycle, where dominance dipped below 60% and then surged to 69% in early 2021. Historically, spikes in dominance have often marked the start of extended bullish phases. Yet, Bitcoin’s price recently took a hit, dropping 3.60% to trade at $98,943. Quite the mixed bag, huh?

Understanding Bitcoin Dominance

Bitcoin dominance is basically the percentage of the total crypto market cap that Bitcoin holds. It’s a key metric that helps us understand the health and trends of the crypto market. When Bitcoin dominance rises, it often means that investors are looking for stability and are less interested in riskier cryptocurrencies. You can really see this when the market is shaky.

Bitcoin dominance has seen some wild fluctuations over time. For example, back in the 2020 cycle, it fell below 60% in November 2020 but bounced back to 69% by January 2021. This surge was followed by a massive price increase, signaling a bullish trend. Similarly, in 2018, Bitcoin dominance plummeted to 37% thanks to the altcoin craze, but the following year, it rose back to 71% as altcoins crashed.

Market Indicators

There are several indicators to keep an eye on to gauge the potential direction of Bitcoin dominance and the overall market:

  • Bitcoin Cycle Index (IBCI): The IBCI is now in a “distribution zone” for the first time in eight months, which might suggest a more cautious market outlook.
  • Puell Multiple and MVRV: Some metrics hint that the market could be nearing a cyclical peak. While certain indicators are still below critical levels, it’s wise to exercise caution as the NUPL approaches its upper limits.
  • Active Bitcoin Addresses: A 2.30% increase in active Bitcoin addresses over the last week shows that there’s renewed interest and activity in the market.

The Effect on Altcoin Markets

Pressure on Altcoins

Even though Bitcoin’s rising dominance seems bullish, it’s also putting serious pressure on the altcoin sector, leading to significant declines. When Bitcoin’s dominance climbs, the market cap of altcoins usually remains stable or drops, as investors shift their funds to Bitcoin. This ultimately results in weaker performance and lower prices for altcoins.

Investor Behavior

Investor behavior is a huge factor in how Bitcoin dominance impacts altcoins. During uncertain or bearish market conditions, people tend to flock to Bitcoin instead of altcoins. This shift diminishes the allure and value of altcoins, causing their prices to dip. In bearish markets, the goal is to minimize risk by moving to less volatile assets like Bitcoin.

Institutional Interest and Market Volatility

Positive Aspects

Institutional involvement could potentially bring stability and credibility to the Bitcoin market. Large investors such as hedge funds and asset managers introduce significant capital, which might help smooth out price fluctuations.

Negative Aspects

That said, institutional engagement can also increase volatility at times. If institutions are in it for short-term gains rather than long-term holds, their actions could amplify market volatility. Their buying and selling can heavily influence the market cap, leading to larger price swings.

Overall Impact

So while institutional interest can add legitimacy and capital to the Bitcoin market, it’s not a surefire way to reduce volatility. The type of institutional participation—long-term versus short-term—and broader market dynamics all play a role in determining the overall impact.

Summary

In short, Bitcoin’s rising dominance may indicate bullish trends but it also puts a strain on altcoin markets. Historical patterns and market indicators suggest that while increased Bitcoin dominance can be bullish, it’s essential to consider other indicators and macro-economic factors for a complete market picture. Institutional interest can provide both stability and volatility, depending on how they play the game. Keeping up with market dynamics is key for anyone navigating the crypto market.

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Egor Romanov
About Author

Egor Romanov is an experienced crypto analyst, professional trader, and author of trading strategies and the Cryptorobotics blog, where he shares his knowledge about cryptocurrencies and financial markets.

Alina Tukaeva
About Proofreader

Alina Tukaeva is a leading expert in the field of cryptocurrencies and FinTech, with extensive experience in business development and project management. Alina is created a training course for beginners in cryptocurrency.

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