Cryptocurrency Pairs – Why The Market Follows Bitcoin

Cryptocurrency pairs are coins/digital assets that can be traded for each other on a trading platform — for example, Bitcoin/Ethereum (BTC/ETH). Therefore, a cryptocurrency pair is a function whereby you compare prices between two different currencies that can be swapped between one another in the same way.

There are many reasons for investors to understand cryptocurrency pairs. For instance, these pairings help them expand their trading opportunities beyond the most common assets. It also gives savvy speculators the chance to profit from differences in crypto prices between markets, also known as arbitrage strategies.

Understanding Crypto Pairs

To take full advantage of cryptocurrency pairs, you need to be familiar with some basic concepts. One of the most prominent notions in this respect is Bitcoin dominance – the ratio between the Bitcoin market capitalization compared to the rest of the cryptocurrency market.

If you have been following the market for a while, you may have noticed that when the price of Bitcoin goes up, alternative cryptocurrencies (commonly called altcoins) tend to follow suit. The opposite is equally true – every time Bitcoin’s price goes down, it is likely that altcoins will decline at the same time.

The resemblance between Bitcoin and other cryptocurrencies might seem baffling to newcomers, who may have been drawn to the cryptocurrency ecosystem primarily due to the diversity in applications. However, aspiring investors should always perceive this reality – the entire crypto market depends heavily on one coin – the mighty Bitcoin.

So why does this pattern reveal itself? What makes BTC so influential to the point where a $2 trillion market follows it so closely? Let’s dig in.

Bitcoin: The First and Largest

From a purely historical perspective, Bitcoin is the seed of what became a mighty cryptocurrency forest. While the majority of altcoins have repurposed Bitcoin’s code to suit their needs, others have come up with completely new concepts. From new governance and consensus mechanisms, smart contract platforms, and much more.

Being the pioneer has put a lot of weight on Satoshi Nakamoto’s brainchild and also allowed Bitcoin to cement itself as a crowned asset. The original cryptocurrency paved the way for the ecosystem to mature and also put its underlying tech, blockchain technology in the spotlight.

Thanks to a large number of miners participating in Bitcoin’s blockchain, the No.1 cryptocurrency is widely considered the most stable, secure decentralized network. Even though some observers point to high levels of volatility in Bitcoin price, it is nonetheless less volatile than many altcoins. This is mainly because liquidity in the Bitcoin network is better and deeper than other cryptocurrencies. Rafaela Romano, editor in Chief at Cointelegraph, stated:

“The correlation between Bitcoin and other cryptos can be understood through three concepts: leadership, dominance, and forks. Bitcoin inaugurated the cryptocurrency industry and for most of the industry’s history, crypto has accounted for over 60% of all market dominance. Furthermore, an expressive part of crypto are Bitcoin forks, they use exactly the same technology as Bitcoin.”

Bitcoin Dominance Insights

Bitcoin dominance is an interesting metric to keep an eye on. For example, when BTC expands its dominance, it means that crypto traders are looking for a safer vehicle to invest or park their money in. And when it goes down, it may suggest a price reversal is just around the corner, and it’s time to flip the momentum to other coins.

Do remember that calculating Bitcoin dominance based on market cap allocation does not mean an influx of investments into or out of. It is merely a calculated ratio based on the circulating supply and current market price.

“Not all cryptocurrencies follow the Bitcoin trend unreservedly. In recent years, the sector has seen the development of ”alt season”, an event in which, during the bull market (important!), cryptocurrencies manage to outperform Bitcoin, bringing down the asset’s dominance below 60%, while the capital flows to other smaller capitalization projects. In addition, recently, the blockchain game industry has managed to develop uncorrelated to the general market trend. While the price of Bitcoin has dropped more than 50%, altcoins from games like AXS and SLP have gone up 1000% and 200% respectively. The secret of decorrelation? A community of its own, driven and built by guidelines and incentives different from those that motivate the development of Bitcoin,”explains Romano.

Bitcoin as a Safe Haven

Due to its relative stability, skittish investors consider Bitcoin as the reserve currency of the crypto market. Similar to the U.S. dollar and gold in the traditional financial markets, it’s completely understandable that while the bear market is in effect, investors tend to liquidate their positions in altcoins to buy Bitcoin.

Furthermore, Bitcoin acts as a base currency in crypto pairs since many platforms do not offer crypto-to-fiat trading due to regulatory scrutiny. As so, many investors have no choice but to buy Bitcoin to trade it for altcoins initially. This phenomenon also explains why Bitcoin sometimes rises even as the entire market drops, and sentiment plummets.

Bitcoin Losing Market Dominance

As you would expect, Bitcoin had few competitors in its early days. Back then, the original coin had a market dominance of more than 90% market dominance as major altcoins, stablecoins, and tokens didn’t exist.

All of this started to change when alternative digital assets emerged and began to eat into the market share of Bitcoin. In 2017 and beyond, Bitcoin’s dominance plunged dramatically as a spate of fundraising methods – like ICOs – boosted the crypto market valuation substantially. By late May, BTC dominance had fallen to just 39% with liquidity moving to other crypto assets instead.

Conclusion

Bitcoin is the original digital asset that jump-started the entire cryptocurrency industry. This pioneering status has given it the final word regarding market sentiment.

While it remains on top of the crypto landscape, Bitcoin is suffering from a significant reduction in dominance compared with where it was over the last decade.

This change in Bitcoin’s influence is not necessarily a good or bad. Instead, it’s a valuable tool that may better understand how the cryptocurrency ecosystem evolves.

Hopefully, our article managed to shed some light on the reasons behind this phenomenon.

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