Bitcoin entered the world in 2009 with a simple pizza purchase. Since then, it’s smashed expectations and even became the 3rd most valuable currency (crypto and fiat) back in 2021. Even though it’s slipped down to position 27 today, it demonstrates how seriously cryptocurrency must be taken. As well as Bitcoin, there are over 9,000 altcoins, which all attempt to solve a different problem. However, regardless of a coin’s purpose, its value is typically linked to Bitcoin’s movements, and here’s why.
Bitcoin Has a Market Cap Dominance
Without searching too deeply, the reason why altcoins flow in the direction of Bitcoin is that their value is usually decided in Bitcoin. Despite having over 9000 competitors, Bitcoin still monopolizes more than half of the crypto market, which means it has plenty of control and influence.
Many altcoins can’t be bought using fiat currencies, which is why people tend to buy Bitcoin and trade from there. Likewise, when exiting the market, altcoins are often exchanged into Bitcoin and then fiat money. This ongoing relationship marries together the price of bitcoin and altcoins.
The intrinsic link between Bitcoin, altcoins and fiat money means that Bitcoin is used to measure the value of altcoins. Therefore, when the value of Bitcoin decreases, so does the value of altcoins. However, this isn’t always the case, as we’ll explore below.
Bitcoin Confidence Trickles Down
Crypto exchanges hold onto around 2.6 million Bitcoins, and they’re simply sitting there as a reserve. Investors keep an eye on crypto exchanges for large outward movements of Bitcoin, which often indicate that an accumulation phase is on the horizon. In simple terms, this means the market is about to enter a bull period (value increase). Investor confidence in Bitcoin often makes its way to altcoins, which is why more money is put into them.
Not Clear-Cut
We’ve covered plenty of reasons why altcoins move with the value of Bitcoin. However, just because this is the overall trend, there are instances where the value of Bitcoin moves on its own or altcoins move without Bitcoin. When Bitcoin falls in value and altcoins rise, it’s typically because investors pull away from Bitcoin and back profit-potential altcoins. On the flip side, when Bitcoin enters into a bull period, investors tend to return their assets to Bitcoin.
Price surges aside, this doesn’t mean that all altcoins follow the same rule. The crypto market doesn’t hit peaks and troughs like traditional markets, which is what makes it so unpredictable and volatile. To combat this volatility, the best way to navigate crypto investment is by using Dollar Cost Averaging (DCA), which involves investing the same amount at regular intervals. The general idea is that you’ll spread your profits and losses more equally.
Bitcoin will dominate the crypto world for the foreseeable future, which is why altcoins will largely follow in its footsteps. However, nothing is concrete in the crypto world and assets can behave outside of market trends. The only way to handle this is by implementing a proper trading strategy.