In the world of digital currencies, Bitcoin ($BTC ) is the leading and most influential currency, not only because of its market value but also because of its wide-ranging impact on other cryptocurrencies. It is often observed that the rise or fall of Bitcoin leads to similar movements in the rest of the market, even if other currencies differ from it in function or technology. So what is the reason behind this close correlation? Here’s the explanation:
1. Market Leadership and Symbolic Strength
Bitcoin is the first cryptocurrency created in 2009, and it established the concept of blockchain and decentralized currencies. This leadership has made it the "digital gold" and has given it a moral authority that influences the market as a whole. Therefore, any change in its price is seen as a general indicator of the market's health or investor sentiment.
2. Market Dominance (Bitcoin Dominance)
Bitcoin dominance refers to the percentage that represents Bitcoin's market value compared to the total market value of all cryptocurrencies. When this dominance rises, it means that Bitcoin is capturing a larger share of investor attention, and when it falls, it may indicate that capital is shifting to alternative coins (Altcoins). Therefore, Bitcoin's movements directly affect the flow of money within the entire market.
3. Impact of Liquidity and Trading
Bitcoin enjoys the highest levels of liquidity in the cryptocurrency market, meaning it is easy to enter and exit the market using it. This makes it the primary currency in most trading pairs, especially on platforms that do not use dollars or fiat currencies. When Bitcoin rises, optimism is injected into the market, prompting investors to pour money into other currencies, and vice versa.
4. The Psychological Behavior of Investors
The majority of individual and institutional investors treat Bitcoin as a key indicator of market direction. When it rises, it is seen as a positive signal for investing in alternative currencies, while when it falls, investors feel fear and start selling what they own, leading to a decline in the market as a whole.
5. Technical Analysis and Predictive Models
Many traders rely on Bitcoin's technical analysis to make trading decisions. It is common for Bitcoin's movements to be used to build strategies on other currencies. Therefore, any significant change in Bitcoin's movement automatically reflects on their strategies, and thus on the performance of other currencies.
Can other currencies become independent from Bitcoin?
Currently, most altcoins are still linked to Bitcoin. However, some major projects like Ethereum ($ETH ) and some stablecoins and coins associated with real-world applications are showing some relative independence, especially during periods when the market has sideways trends or focus on specific projects. However, this separation is still partial and temporary.
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In summary: Bitcoin, thanks to its leadership, market value, and history, remains the compass that determines the direction of the cryptocurrency market. Therefore, understanding the relationship between its movements and those of the rest of the market is essential for any investor or analyst wishing to interact intelligently with this dynamic market.
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