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Why do altcoins follow Bitcoin’s price movements?

by Marcin Wieclaw
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Why do altcoins follow Bitcoin’s price movements?

The crypto market has grown in leaps and bounds over the past few years. With Bitcoin’s launch in 2009 – a digital asset that operates on a P2P network- the financial landscape has been transformed significantly. Nowadays, thousands of cryptocurrencies are available, and they all have unique features that appeal to investors. Some see the crypto industry as a disruptive one that can change the global economy in unimaginable ways, while others love digital assets because they have a decentralized nature, thus eliminating the need for central authorities like governments and banks.

Also, one thing that lures many individuals into the crypto market is the potential for substantial returns, as the fluctuations in bitcoin price can sometimes lead to big opportunities. All those stories in the media about people making billions off Bitcoin and other digital assets.. they are just too alluring! However, in reality, the crypto market is more complicated than it looks, as it is characterized by drastic price fluctuations. As the first digital asset to be introduced, Bitcoin has a strong impact on the entire crypto market. More specifically, its performance triggers a ripple effect on altcoins, which tend to follow the same price movements as the crypto leader. Let’s further take an in-depth look at Bitcoin’s market dominance and its correlation with altcoins.

What is market dominance, anyway?

Market dominance is an essential concept in the crypto industry, referring to the impact that a particular cryptocurrency has on the entire market. As the first and most popular cryptocurrencies out there, Bitcoin has maintained an established position in terms of market dominance.

This position is reflected in Bitcoin’s market cap, which is now beyond $1 trillion, accounting for more than half of the entire crypto market. Bitcoin’s popularity is highly linked to its first-mover advantage, having created a solid user base. In fact, people even use Bitcoin and crypto interchangeably, as they have associated the entire concept with this fantastic asset. So, it’s not surprising that Bitcoin is the most trusted digital asset in the market.

What determines the price movements of Bitcoin?

Different factors influence Bitcoin’s performance on the market. One of them is the law of supply and demand, affecting the market price and quantity of a particular commodity. For example, when the demand for an asset declines, its price tends to increase while sellers produce more of it, and vice versa. This law is notable, especially when it comes to Bitcoin, because the asset is scarce, meaning that it has a limited supply of 21 million coins. During the Bitcoin halving, which happens every four years, the rate at which new BTC enters the market reduces, slowing down supply growth. Suppose the demand for the asset remains constant ( or increases); this will naturally result in higher Bitcoin prices.

News and media also play a significant role in how Bitcoin performs because they impact investor sentiment. The crypto market is highly influenced by human psychology, so a positive market sentiment will result in a price increase, while a negative market sentiment will lead to a price decline. Social media platforms have an impact on these aspects because they shape investors’ perceptions regarding a specific asset. If a post about a particular asset goes viral, this can cause hype in the market, therefore influencing market sentiment and determining whether the price of an asset goes up or down. Lastly, the regulatory framework also contributes to price movements. If there’s regulatory clarity, and things look favorable for investors, this can boost their confidence, thus driving prices higher. On the contrary, regulatory uncertainty causes fear in the market, and therefore, there is a decline in prices.

Altcoins: what are they, and how do they differ from Bitcoin?

The term altcoin is a combination of two words:” alt,” which means alternate, and “coin.” Put together, they refer to digital assets other than Bitcoin. These digital assets were launched after Bitcoin, following the same decentralized concept while offering some extra features. For instance, Ethereum (the largest altcoin by market cap) is one of the investors’ favorite investment options, alongside Bitcoin.

Ethereum introduced smart contracts, a revolutionary concept that enables the automated execution of contracts between different parties by relying on blockchain technology. Other altcoins address Bitcoin’s drawbacks to provide competitive solutions. For example, many altcoins provide enhanced functionality, better scalability, and faster transactional speeds. Nevertheless, compared to these altcoins, Bitcoin still remains the crypto with the largest market cap.

How does Bitcoin influence altcoins?

Unsurprisingly, the price movements of Bitcoin set the tone for the entire crypto market. In other words, when the crypto leader experiences a price rise or decline, this causes a domino effect on the market, meaning that altcoins follow the same movements. Investor sentiment is one of the ways Bitcoin’s price fluctuations affect the overall crypto market. There is a sense of FOMO that often characterizes the industry, causing investors to buy when the price of Bitcoin is on the rise, which drives up altcoins prices as well. Conversely, when there is a dip in Bitcoin’s price, investors rush to sell their coins, and consequently, the prices of altcoins also plummet.

The first correlation between the crypto leader and altcoins was first discovered in 2017 when market analysts and experts say that Bitcoin’s collapse caused a drop in other assets’ capitalization as well. Fast forward to this day, investors check Bitcoin’s price almost all the time when trying to decide what to do with their altcoins. Now, it’s worth noting that promising altcoins can also experience bull runs on their own, but that only happens if they receive enough market hype. Overall, Bitcoin serves as a reference point for investors when it comes to price movements of altcoins and the performance of the entire cryptocurrency market.

Takeaway

Bitcoin has been called the crypto king for a reason – as a major player in the digital assets landscape, it dictates the direction of altcoins as well. This correlation has been evident throughout the years, and if you look at the most recent events in the crypto universe, the market is flourishing mostly due to the events impacting the Bitcoin ecosystem, like the launch of spot ETFs and the upcoming halving event. So, analyzing how Bitcoin performs may be a great starting point when looking to invest in an altcoin.

 

Author

  • Marcin Wieclaw

    Marcin Wieclaw, the founder and administrator of PC Site since 2019, is a dedicated technology writer and enthusiast. With a passion for the latest developments in the tech world, Marcin has crafted PC Site into a trusted resource for technology insights. His expertise and commitment to demystifying complex technology topics have made the website a favored destination for both tech aficionados and professionals seeking to stay informed.

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