In brief
- There are now more than 3,000 altcoins, or cryptocurrencies that are not Bitcoin.
- Generally, altcoin prices follow that of Bitcoin.
- This tends to be because altcoin buyers generally purchase Bitcoin with fiat currency, to exchange for their chosen altcoin.
Since Bitcoin brought about the birth of the cryptocurrency industry in 2009, the famed crypto asset has gone from being used to buy takeaway pizza to becoming the sixth largest currency in the world.
But Bitcoin isn’t the be-all and end-all of cryptocurrencies; during the crypto industry’s first decade, the number of cryptocurrencies in existence increased exponentially. On CoinMarketCap, there are now over 3,400 altcoins, or cryptocurrencies that are not Bitcoin. They have many different use cases, from governance to powering data oracles.
Yet most of the time, altcoin prices are intimately tied to the price of Bitcoin, tracking with it through thick and thin. Why?
Bitcoin’s dominance of the crypto market cap
The fundamental reason behind altcoins following Bitcoin is because altcoin prices are typically measured in Bitcoin. The original crypto asset may be flanked by over 3,000 competitors, but it still commands over half of the entire cryptocurrency market cap. This domination of the crypto market affords Bitcoin a lot of influence and control.
In addition, most altcoins can’t be purchased directly using fiat currencies; instead, the majority of buyers purchase some Bitcoin first, and then trade it for their altcoin of choice. Therefore, if someone holding altcoins wants out of the crypto industry altogether, it’s most likely they would first sell their assets for Bitcoin, and then convert Bitcoin back to a fiat currency. This symbiotic relationship means that the value of different altcoins is often tied to Bitcoin.
As a result, an altcoin’s value is often measured against the price of Bitcoin, so the price of altcoins could go down if Bitcoin goes down, and conversely, the price of altcoins could go up if Bitcoin goes up.
“Usually you’re going to have one leader, and everyone follows the leader because they’re all interconnected,” said Michael Dunworth, CEO of Wyre, a company using blockchain technology to build effective ways of transferring money.
As we’ll discover, this rule of thumb doesn’t always hold true, but there is also something to be said for Bitcoin acting as a reserve currency for the biggest crypto exchanges.
Bitcoin as a reserve currency for exchanges
According to Glassnode, there is just over 2.6 million Bitcoin sitting on crypto exchanges globally. In June 2020, the total amount of Bitcoin held on exchanges hit a year-long low of 2,310,466.
When there is an increase in the outflow of Bitcoin from the industry’s largest exchanges, investors tend to view this as a positive sign for the currency. This is because investors expect Bitcoin to enter into an accumulation phase, meaning a bull market may be around the corner. This confidence can trickle down to competing altcoins and benefit the wider crypto market.
Things aren’t always as they seem
As we can see, there are plenty of reasons why altcoin prices usually follow that of Bitcoin. However, sometimes Bitcoin drops in value while altcoins experience a surge in value. A fundamental reason for this is that investors with a watchful eye will pull money out of their Bitcoin investments, and instead pivot to altcoins that are showing promise.
Conversely, if Bitcoin does experience a bull run on its own, investors can pivot back to the leading cryptocurrency to enjoy a ride of their own.
Yet, even within altcoin price surges, it isn’t necessarily true that all altcoins will obey the same rules, or behave in the same way. Contrary to traditional markets, cryptocurrency markets do not always crash and boom in unison.
In July 2020, Changpeng Zhao, CEO of crypto exchange Binance, suggested that not all altcoins will benefit from the next altseason (a non-Bitcoin bull run).
Not all alts will pump during the next #altszn. If a project has been around for 3 years but not much to show for, then...
A few that have consistently pushed development will thrive.#BUIDL
— CZ Binance (@cz_binance) July 8, 2020
“Not all alts will pump during the next #altszn. If a project has been around for 3 years but not much to show for, then...A few that have consistently pushed development will thrive,” Zhao said on Twitter.
There may be thousands of cryptocurrencies in the market today, but the first one out of the gate is still calling the shots.