Just like bitcoins, you must have heard and know about other cryptocurrencies. Like many others, you must aware of the fluctuations in the price of Bitcoin and made the snap decision to purchase some in order to grab some extra money out of it. However, the other cryptocurrencies too are now feasible and profitable to invest in. On further investigation, you will learn about the existence of some of these altcoins like ETH and DogeCoin. It is apparent that Altcoin prices typically move in lockstep with Bitcoin mining. So, to invest, you have to gather the correct knowledge about them.
This was mathematically demonstrated in an academic publication published in 2019 about bitcoin. In a nutshell, the demonstration says, the bitcoin system is the pioneering cryptocurrency and reigns supreme. Sometimes it takes a while to figure out why there is a correlation. Here is why Altcoins follow Bitcoin?”
Correlation between them:
For various factors, including the historical availability of crypto trading pairs, Bitcoin’s role as a gauge of market emotion, and many crypto traders using BTC as their base currency, altcoins follow Bitcoin. This pattern is pronounced. It is not, however, unchangeable or final. For instance, you can’t automatically expect that all other coins will move 10% if the price of Bitcoin increases by 10%. Some will outperform, while others might even see a price drop. Numerous cryptocurrencies exist, and the financial markets are intricate.
Why does other altcoin’s value get influenced by bitcoin?
- Using bitcoin to gauge market mood:
It’s no secret that the bitcoin market impacts other currencies. It is widely acknowledged as valid. Most cryptocurrency traders are aware of the dynamics. These factors make it familiar and logical to view BTC price changes as a reflection of the market’s overall mood.
For instance, if the price of Bitcoin spikes unexpectedly, many traders may rush to buy altcoins hoping that altcoin prices will soon follow. The prices of Alt/USD automatically rise due to this Alt buying pressure.
- BTC copycats:
Many other currencies, like Litecoin and BCH, are copies of Bitcoin. They operate using the same proof-of-work consensus process and depend on analogous narratives to explain their value. Therefore, it makes sense that these clones will enjoy an increase in perceived worth as BTC’s reputation and price rise. This increases buying pressure, which causes these altcoins to track BTC’s price movement.
Do all cryptocurrencies follow bitcoin?
After determining the general correlation trend, you might wonder if all altcoins adhere to Bitcoin. No, is the short and straightforward response.
Bitcoin’s price is linked to certain fiat currencies, like the USD or EUR. This is done to give traders access to cryptocurrency while lowering their exposure to volatility. Thus, regardless of whether the price of Bitcoin rises or falls, stablecoin prices always remain constant.
Additionally, some systems have explicitly produced coins designed to move against swings in the price of bitcoin. This enables traders to lower the overall volatility of their portfolio or lower risk under volatile market situations. This is referred to as “hedging.” These assets work as hedging assets to beck the market while a critical situation like inflation, which means they increase in value when the market declines. Inverse BTC from Synthetix is one such token (IBTC). This coin is intended to go in direct opposition to bitcoin. IBTC, for instance, is intended to lose value if BTC’s value is raised by 10%.
Additionally, some assets haven’t historically followed the price movement of BTC. Several well-known coins, including ATOM, LINK, and XTZ, have occasionally been negatively associated with Bitcoin. However, the strength of this link varies over time.
Will altcoins always follow bitcoin?
It’s a well-known trend in cryptocurrency that Altcoins follow the bitcoin system. But it’s unclear whether alternative cryptocurrencies will always lag behind Bitcoin.
First, as the crypto business develops, we can already see distinct sectors emerging. We have Store of Value (SOV), non-fungible tokens (NFTs), decentralized finance (Defi), and other identifiable sector verticals, for instance. Investors with more knowledge no longer view the cryptocurrency market as a homogenous entity.
The decreased correlation between bitcoin and altcoin is necessary for the economy. It is also beneficial for the economic future of the world. Breaking free from Bitcoin’s sway will enable investors to judge a coin’s merit based only on its intrinsic value, rather than needing to account for short- and long-term fluctuations in the price of Bitcoin. This will enable less well-known and smaller ventures to succeed and get recognition on their own.