Over the past three months, bitcoin, the most dominant cryptocurrency in the global market, has gained more dominance over the market amidst the third worst correction in the market’s history.
35% to 42% in Two Months
In May, the dominance index of bitcoin was at around 35 percent, during a period in which the cryptocurrency market initiated a large corrective rally to previous support levels. However, as hundreds of ICOs died out and the bear market came about, the dominance of bitcoin started to rise. From May to July, within a two-month period, the dominance of bitcoin rose by 7 percent.
Investors often tend to resort to major digital assets like bitcoin and ether, the native cryptocurrency of the Ethereum blockchain protocol, in bear cycles, primarily due to the trend of tokens and small digital assets of experiencing intensified movements on both the downside and upside.
As shown in the chart below provided by CoinMarketCap, the dominance index of bitcoin has started to increase in mid-April as the cryptocurrency market started to record large drops in valuation and volume.
Throughout the past week, the cryptocurrency market has begun to regain some momentum and stability, triggered by an increase in volume of major digital assets. In both short-term and mid-term rallies, tokens and minor cryptocurrencies tend to outperform BTC and eETH. Consequently, the dominance index has fallen since July 1, exactly when the market began to recover.
Cryptocurrencies Tend to be Locked Together
In February, $83 billion Goldman Sachs reported that bitcoin and other cryptocurrencies tend to move in a similar manner and trend.
Goldman Sachs head of Global Investment Research Steve Strongin said in a note to clients obtained by Business Insider UK:
“The high correlation between the different cryptocurrencies worries me. Contrary to what one would expect in a rational market, new currencies don’t seem to reduce the value of old currencies; they all seem to move as a single asset class. This is actually an important distinction between cryptocurrencies and fiat currencies; if a government decides to phase out a currency, it will typically determine a residual value for that currency and exchange that currency for a replacement one.”
When BTC or ether move down, cryptocurrencies with smaller market caps plummet to the downside by larger margins and when BTC or ETH move up, small cryptocurrencies surge by 10 to 20 percent more gains.
This worrying trend of correlated movements has led the dominance index of BTC to remain relatively low at the 30 percent region for awhile but in mid-term bear markets, because small cryptocurrencies simply perform poorly, the dominance index of BTC rises.
At this phase of the market wherein hundreds of new tokens and cryptocurrencies are being created on a monthly basis, the dominance index of bitcoin is a consistent indicator about the state of the market. Usually, when the dominance index of bitcoin is low, the market is in a bear cycle and when the dominance index of bitcoin is high, the market enters a bull market.
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Last modified: March 4, 2021 5:09 PM