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The cryptocurrency market has suddenly shifted back to Bitcoin (BTC) after several months of a decentralized finance (DeFi) frenzy. While market cap dominance remains below 60%, earlier this month, the trading dominance of BTC has spiked to levels not seen since 2017 when the price hit an all-time high at $20,000.
The trading dominance of Bitcoin against other major cryptocurrencies. Source: TheTie
Due to the growing dominance of Bitcoin in terms of market volume, the alternative cryptocurrency (altcoin) market is stagnating. The trading dominance of the bellwether for altcoins, Ether (ETH), for instance, did not see a similar spike in the same period.
Why does the altcoin market underperform when Bitcoin is going up?
As seen from July to early September, when Bitcoin is climbing upwards gradually, it can cause an “altseason” to materialize. In fact, ETH has outperformed BTC so far this year in terms of percentage, which is partially why the momentum may be returning back to Bitcoin.
Especially during August, many DeFi tokens increased between 5 to 20-fold, causing a massive altcoin craze.
But when the price of Bitcoin goes up quickly in a short period, it can cause the altcoin market to slump. Profits are likely cycling in from altcoins back into stablecoins and Bitcoin, leading BTC to rally by itself.
Su Zhu, the CEO of Three Arrows Capital, emphasized that Bitcoin going up quickly could be bearish for altcoins. He explained:
“BTC going up swiftly is not only not bullish for alts but it’s bearish. Reasons for this are myriad but boil down to the fact that money is a coordination game and Bitcoin is the Schelling point; this is independent of how you feel about it, community is literally irrelevant.”
A similar trend has been spotted across major cryptocurrency exchanges. On Huobi, Bitcoin trading volume’s market share has been increasing, as shown by the data from Skew.
The share of major cryptocurrency volume on Huobi. Source: Skew
The trading data on Huobi is significant because the exchange has 1.1% of the Bitcoin supply in its cold wallet. It remains one of the biggest exchanges in the world in terms of cryptocurrency reserves, alongside OKEx and Binance.
What does this indicate for BTC?
In the past 13 days, the price of Bitcoin has increased by more than 12% against the U.S. dollar. The strong performance of BTC comes after a series of negative events that could have caused a major pullback.
As Cointelegraph extensively reported, several exchange-related news, including the suspension of withdrawals by OKEx, caused BTC to drop below $11,300. Despite the uncertainty in the market and the slump of U.S. equities, BTC pushed above $11,700.
Analysts remain relatively confident in the optimistic medium-term trajectory of Bitcoin. But if BTC pulls back in the short term as the market seeks for relief, it could cause a bigger altcoin correction.
A potential Bitcoin scenario in the medium-term. Source: Michael van de Poppe
Michael van de Poppe, a full-time trader at the Amsterdam Stock Exchange, believes BTC would likely drop back to $11,100. Referring to a chart that expects a BTC pullback to $11.1K. He wrote:
“Still standing behind this view, there’s such a big hurdle coming up for $BTC.”
Image Credit: Refer to Source
Author: Refer to Source Cointelegraph By Joseph Young