The cryptocurrency market has become an industry, shaking up the world of digital finance. Its advancements propel hopes, changing the society as well as global digital trends. The decentralized finance method that accompanied crypto technology innovations has been a revolutionary fit over the past few years.
What is an Altcoin
Alternative currencies, “altcoin,”refers to all digital cryptocurrencies launched after the success of Bitcoin. We have over 900 altcoins since the invention of Bitcoins. According to the CoinMarketCap, altcoins account for about 34% of the total cryptocurrency market as of 2020.
An altcoin is a combination of two words, “alt”and “coin.”that includes all alternatives to bitcoin. The fame of Bitcoin, being the first crypto on the blockchain technology, paved a path for a lot of the other cryptocurrencies. Litecoin, Ripple, Ethereum, and all other cryptocurrencies that are not bitcoin all fall under alternative coins.
You may be wondering, why do we have similar alternative currencies when Bitcoin is doing well in the crypto space? Well, Bitcoin isn’t a perfect cryptocurrency. Many of these other currencies were also created to find a better or different version of cryptocurrency. Each altcoin has a unique way of standing out on its own.
Until today, thousands of alternative coins have been released into the crypto space, and we have a lot of them showing apparent signs of similarity to the bitcoin market. This reality is what we will be talking about in this article. Before we do that, let’s jog your memory and give you a little reminder of what Bitcoins are.
What are bitcoins?
Bitcoin, as we all know, is the oldest cryptocurrency in the crypto space. The bitcoin market was the first alternative to the centralized monetary system. It is a digital currency that was created in 2009. It promises transparency and a peer-to-peer transaction amongst users. It’s a type of money that operates based on decentralized authority.
The bitcoin market has grown a lot in the past years, currently sitting at 600 billion USD by market capitalization. For years, there has been a substantial statistical correlation between the performance of altcoins and Bitcoin. When Bitcoin rises or falls, altcoins tend to do likewise.
The 2017 bull run
The 2017 bull run is a historical event that signifies the fatal crash of Bitcoin in the year 2017. That year, we had good news and bad news. The price of Bitcoin reached an all-time high of 19,660 USD on the 17th of December, 2017. It was a happy time for investors and traders. But that happiness, sadly, was short-lived as the price index witnessed a 30% plunge, shaving off billions of dollars off the total cryptocurrency market capitalization.
Now, we’re not exactly here to discuss the circumstance surrounding this fall. What I want us to consider is the effect of that fall on the altcoins. The drop wiped more than 4000 dollars from the value of the cryptocurrency that year. And what happened to the other alternative currencies? They all lost significant value. While Bitcoin went down 30%, Ethereum plunged by 20%, Litecoin(21%), and nearly every high-profile altcoin also lost their importance within the 24 hours of the plunge.
From the outcome of these events, it is safe to say that the bitcoin market significantly affects the other alternative coins. The decline in the price index caused a tremendous amount of fallout for all other existing altcoins at this time.
The market crash(the great crypto crash)
After the 2017 bull run, the cryptocurrency market witnessed another dip 2018. In November 2018, the total market capitalization fell below 100 billion dollars for the first time since 2017.
The 2018 cryptocurrency crash, also known as the great crypto crash, was the sell-off of most cryptocurrencies in January. 2018. The price of Bitcoin surged below $4000, representing an 80% decline from its peak in the past year’s early days, dragging all other alternative coins to the bottom.
These two occurrences, amongst many others, highlight how linked bitcoin is to altcoins. A reduction in bitcoin price causes an equal decrease in the price index of other altcoins. Alternatively, the bitcoin price pump pushes an increase in other altcoin’s price index.
The first adopted cryptocurrency, bitcoin, has a higher advantage over altcoins. It was a bedrock for all others. Blockchain technology initially started from Bitcoin, and it is no news flash to nobody that many of the succeeding cryptocurrencies were forked from bitcoin. Due to a few reasons, the highs and lows of its price always influence that of others. Some of the reasons for this are explained below.
Bitcoin is the most widely used or known
This information is not new in the crypto world. The impact Bitcoin has on the cryptocurrency market can not be matched by any other currency. It trades more than half the market volume daily and currently has a 59% market share. Ultimately, it is ideal that when it moves, the rest will follow.
It has the largest market of mining operations and processing power. Fundamentally, bitcoin is still considered to be the most secure crypto asset. Although exchanges holding Bitcoin have been hacked in times past, the bitcoin blockchain itself has never been hacked in almost ten years.
These fundamentals have earned bitcoin its reputation and the reason why significant institutions, investors, traders, and many others are more willing to put their money into it. Hence, the growth and effect on the cryptocurrency market as a whole.
Bitcoin’s performance in the market affects altcoins.
The correction between bitcoin and alternative coins is proportional primarily. When Bitcoin price goes through the roof, we find altcoins increasing in performance. Since Bitcoin has the largest market cap, it has the most significant influence on the crypto market. When the price of Bitcoin goes up to a new record high, it pumps more volume into the cryptocurrency market. Naturally, this results in the pull of the market towards BTC, contributing to many positive outcomes for alternative coins.
The primary reason for this is that the holders of altcoin often take advantage of the hard fork. When bitcoin is doing well, people tend to pull more resources into their altcoins. Why? A lot of people see bitcoin as a benchmark for the general performance of the cryptocurrency market.
When Bitcoin is stable, it establishes itself as the ideal base currency for buying altcoins.
Most people will move into bitcoin and other altcoins when the price goes up. When the price goes sideways, they divert their resources into stable coins. Most traders are persuaded to buy altcoins when the market is relatively stable.
The concept of liquidity in this context highlights an asset’s ability to be converted into cash easily on demand. Liquidity is essential for any digital currency. The increase in the number of trusted bitcoin exchanges has enhanced its liquidity. The more it is used as a medium of exchange, the more it becomes liquid. Cryptocurrency price changes quickly, so to ensure that one maximizes profit, you need to be able to move in out and out of the market as swiftly as possible. Traders and investors are encouraged to dabble into markets with a high liquidity rate. This helps them to enter and exit the market without facing a lot of difficulties. The cryptocurrency market is highly known for its volatility. Hence the importance of liquidity in this space.
For this reason, Bitcoin will always have a significant influence on the price of other alternative coins. It is the first entry space into the market and also the fastest exit point. Many other altcoins need to be converted to Bitcoin or ETH before they can be liquidated into cash. Bitcoin is the USD of the cryptocurrency market.
This means that in most cryptocurrency trades, you buy or sell altcoins using bitcoins. Hence, another reason why bitcoins have a significant influence on altcoin prices naturally.
We can all agree that bitcoin has indeed set itself as the most dominant cryptocurrency in the current market. Despite the development of thousands of other altcoins, its advantages are still widely recognized as it operates as the primary trading pair for all other altcoins.
When Bitcoin price increases, it affects all other alternative coins. When the news is about Bitcoin is positive, there is a lot more money flowing into the crypto market as a whole, increasing the total market cap, more revenues will go into bitcoin and also into altcoins. Positive news about the Bitcoin market brings a substantial level of investment into the crypto space.
Bitcoin has that initial advantage, so in most cases, other altcoins are convicted to follow its routine.
Ultimately, it is safe to conclude that the price of bitcoin and altcoins are highly interdependent. Although, despite this correlation, altcoins have shown in several cases their tendencies to underperform when compared to bitcoin. Bitcoin has proved to be a safe harbor for many investors in the crypto space, increasing its market dominance.