How Does Bitcoin Dominance Affect Altcoins?

In the cryptocurrency market, when the price of Bitcoin changes, the prices of other cryptocurrencies tend to fluctuate accordingly. This article will thoroughly analyze the impact mechanism of the rise and fall of Bitcoin prices on altcoins, helping investors understand market dynamics and make more informed investment decisions.

I. The basic relationship between Bitcoin and other cryptocurrencies

1. Market dominance

Since its birth, Bitcoin has been the leader of the cryptocurrency market. When there was only BTC, it had 100% dominance. Later, as more digital currencies appeared in the market, Bitcoin's dominance began to decline.

Bitcoin currently still occupies a relatively high dominance in the total market value of cryptocurrencies. This dominance makes it a bellwether for the entire market. Whenever the price of Bitcoin fluctuates sharply, about 75-90% of the other top 100 digital currencies will show the same direction of change, and a few stablecoins will rise when Bitcoin falls.

2. Liquidity transmission mechanism

Most altcoin transactions are denominated in BTC or USDT, forming a special liquidity transmission path:

The BTC/USD exchange rate fluctuates, and the value of altcoins denominated in BTC changes accordingly.

Market sentiment changes, and investors' risk preferences change.

The fund rotation effect refers to the flow of funds between large-cap and small-cap stocks.

II. The impact of rising Bitcoin prices on altcoins

1. Typical pattern in the early stage of a bull market

When Bitcoin begins to rise significantly, the market usually goes through the following stages:

Phase 1: Institutional funds enter the market, and Bitcoin rises alone.

Phase 2: Funds overflow to mainstream altcoins, such as ETH, SOL, ADA, etc.

Phase 3: Speculative funds chase small-cap currencies and low-cap altcoins.

2. Specific impact path

Liquidity spillover effect, part of Bitcoin profit-taking funds turn to altcoins. New investors seek the "next Bitcoin". Some miners' increased income is converted into investment in altcoin projects. Media attention has increased, driving the popularity of the entire crypto field.

3. Historical data reference (2020-2021 bull market cycle)

Bitcoin rose from $10,000 to $64,000 (+540%)

Ethereum rose from $200 to $4,800 (+2,300%) during the same period

Some small-cap altcoins rose by 10,000%+

III. The impact of falling Bitcoin prices on altcoins

1. BTC's performance in falling markets

When Bitcoin enters a decline, investors first sell highly volatile altcoins. Exchanges face pressure to withdraw, and the bid-ask spread for small-cap currencies widens. Cross-currency margin trading triggers a chain reaction, and the capital reserves of altcoin teams are facing challenges.

2. Vulnerability of different types of altcoins

Some low-liquidity cryptocurrencies can experience a 2-3 times decline compared to Bitcoin and may face the risk of being delisted from exchanges. Some altcoins are sold at a premium and then recover in value. Algorithmic stablecoins are prone to de-anchoring crises (such as the LUNA incident in 2022).

3. Historical data reference (2018 bear market)

Bitcoin fell from $20,000 to $3,200 (-84%)

The average decline of the top 100 altcoins exceeded 90%

Nearly 800 tokens disappeared from exchanges

Note: The smaller the market value, the greater the volatility. Coins with low trading volume are more susceptible to sudden surges and sharp declines. Projects with practical applications are more resistant to declines, and strong communities can provide better price support.

IV. Response strategies

1. Investors should closely monitor the Bitcoin Dominance Index and observe its capital flows. Determine the extreme points of market sentiment, analyze capital inflows and outflows, and assess the risks associated with leverage. This can help investors identify market trends and optimize investment decisions.

2. Differentiated allocation strategies should be adopted at different market stages: increase holdings of BTC when Bitcoin rises alone, and select mainstream altcoins when altcoins contribute to the rise. Gradually reduce positions during the market frenzy stage, and turn to stablecoins or BTC in the early bear market. This dynamic adjustment can reduce risks and increase long-term profit potential.

Bitcoin price fluctuations are like the tides, while thousands of altcoins are like small boats drifting with the tide. Understanding this linkage is not only helpful for market timing but also a crucial foundation for effective risk management.

Disclaimer:

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