Bitcoin drives the cryptocurrency markets. Have you ever noticed when Bitcoin is up, the whole cryptocurrency market is a sea of green and when Bitcoin is down, your favourite altcoin is getting destroyed? TotalCrypto will explain why this happens and examine ways you can profit from it.
- 1 Why Bitcoin Drives Cryptocurrency Markets?
- 2 Cryptocurrencies Priced In Bitcoin? But I See Prices In USD All The Time.
- 3 Bitcoin: The Gateway Into The Cryptocurrency Markets
- 4 Bitcoin As The Safe Haven Cryptocurrency
- 5 Why Is There An Inverse Relationship Between Bitcoin Dominance & Overall Crypto Market Cap?
- 6 How Can You Take Advantage Of All Of This?
- 7 Conclusion
Why Bitcoin Drives Cryptocurrency Markets?
The key reason is that most altcoins don’t have a direct price in conventional currency. Instead, most altcoins only have a price in Bitcoin. Bitcoin’s trading pairs actually account for around $6 billion (32%) of the entire cryptocurrency market trading volume every 24 hours. This means the price of Bitcoin has a massive impact on the overall market.
It is true that some of the larger cryptocurrencies have prices in conventional currency. For example, you can buy Ethereum, Bitcoin Cash and Litecoin with conventional currency on Coinbase or EOS with Korean Wan on Bithumb. However, most traders look at Bitcoin as the base currency in crypto trading and the goal is to outperform Bitcoin. BTC is still an important benchmark for cryptos that can be bought directly with conventional money.
Outside of the major players in the cryptocurrency markets, Bitcoin’s impact on markets becomes stronger. For example SALT is a top 100 cryptocurrency and over 75% of it’s daily trading volume is in the SALT/BTC trading pair. This also means that the major way of measuring the value of SALT is in Bitcoin, rather than in USD or any other measure.
The same story is true for other top 100 cryptocurrencies that are not major players listed on the likes of Coinbase. These cryptos do not have a direct USD price and they only really have a direct price in Bitcoin. Knowing this, it is perhaps no wonder that the price of these cryptocurrencies is driven by the price of Bitcoin.
Cryptocurrencies Priced In Bitcoin? But I See Prices In USD All The Time.
Yes, you will see USD prices for every cryptocurrency on sites like TotalCrypto.io or Coinmarketcap.com. The trick is understanding how these prices are calculated.
Whenever you see a price for a cryptocurrency like Basic Attention Token, the USD price of the coin will be calculated by converting it’s Bitcoin price into USD. For example:
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You can see that the BAT price is 0.00004731 Bitcoin.
The price of Bitcoin at the time of writing is $8,318.88.
$8318.88 * 0.00004731 = $0.393 (The USD price you see Basic Attention Token quoted at above).
Most people are used to pricing things in USD. What you need to know is that most cryptocurrencies have no direct US price and are priced in Bitcoin instead. This is a key reason why the Bitcoin price has such an impact on cryptocurrency markets.
Bitcoin: The Gateway Into The Cryptocurrency Markets
Bitcoin is the biggest brand in cryptocurrency. Indeed, most regular people have only heard of Bitcoin and are not even aware of cryptos like Ethereum. The result is that newcomers to the market usually start off by buying Bitcoin and find out about other altcoins later.
Yes, you can buy Bitcoin, Bitcoin Cash, Litecoin and Ethereum with conventional money. However, if you want to buy any other cryptocurrency, then chances are you will use Bitcoin to buy them. Actually, buying other cryptocurrencies is Bitcoin’s main function right now and this can be seen in how dominant it is in 24 hour market trade volume.
Put simply, Bitcoin is still the major gateway into the cryptocurrency markets. It is usually the first crypto investors buy and is the most used method to buy other more exotic cryptocurrencies. In addition, traders usually measure their gains and losses in Bitcoin, rather than USD. Why do they do this? Well, a trader needs to outperform the market to be deemed successful. If Bitcoin goes up 200% and the trader returns just 100% in USD value, have they really done well? The answer is no, the trader would have got significantly better returns by just buying and holding Bitcoin; trading actually lost them money. This is why Bitcoin is commonly seen as a trading benchmark to outperform against.
What you need to know is that Bitcoin is heavily intertwined with the whole cryptocurrency market and this is a key factor leading to crypto marketing following Bitcoin.
Bitcoin As The Safe Haven Cryptocurrency
Cryptocurrency markets are volatile. It may be surprising to know that Bitcoin is commonly viewed as a safe haven coin in times of market instability. As outlined previously, traders want to outperform Bitcoin. Holding Bitcoin means that a trader owns the same amount of Bitcoin today as they will in a months time and this is why Bitcoin is commonly used as a safe haven cryptocurrency. Need some proof? The easiest way of showing this phenomenon is by looking at the overall cryptocurrency market cap and comparing it with the Bitcoin dominance chart. For those that don’t know:
- Total Market Capitalization is a way of measuring the total valuation of the entire cryptocurrency market. It is calculated by adding the market caps for every cryptocurrency together. Each individual cryptocurrency has their market cap calculated by using the formula: price * coin supply = coin market cap.
- Bitcoin Dominance is the share of the the entire cryptocurrency market owned by Bitcoin. For example, if the total cryptocurrency market cap was $500 bn and bitcoin alone had a market cap of $250 bn, then Bitcoin dominance would be 50%.
You can see from the graph below that the cryptocurrency market cap peaked in early January 2018.
In January 2018, you can also see that Bitcoin dominance was at its lowest percentage for the year. Also, you should be able to spot that the two graphs are almost exactly the inverse of one another.
Why Is There An Inverse Relationship Between Bitcoin Dominance & Overall Crypto Market Cap?
Put simply, when the overall cryptocurrency market is going up, there is more risk taking. Investors look at Bitcoin and think that they might see Bitcoin’s price increase from $10,000 now to it’s previous all time high of $20,000. Doubling your money is not bad but won’t make you rich. Instead, when investors feel bullish about the crypto market they look to gain bigger returns by buying altcoins. Instead of looking to get a 100% gain in Bitcoin, investors may look at altcoins like Ripple and think:
- XRP is now priced at 70 cents.
- 4 months ago it was priced at $3.84 per token.
- Ripple needs to gain 450% from its current price to reach it’s previous all time high.
- A potential 450% gain is better than 100%. So investing in altcoins is the way forward.
This is the key reason why altcoins rise faster than Bitcoin when the overall cryptocurrency market cap increases. Investors are simply happier to take on more risk in a rising cryptocurrency market. Conversely, when the crypto market is falling from all time highs, traders usually protect their gains by converting them into Bitcoin or conventional currency. This is why Bitcoin falls less than altcoins when the overall cryptocurrency market goes down.
Still not convinced of increased risk taking when the cryptocurrency market is going up? Well, Initial Coin Offerings are commonly seen as the most risky type of cryptocurrency investment. After all, most ICOs have nothing but an idea. It’s not much of a secret that the cryptocurrency hype hit all time highs in December 2017, around the same time when funds raised through ICOs topped out.
How Can You Take Advantage Of All Of This?
When Bitcoin dominance is low and the overall cryptocurrency market is high, it might be a good idea to convert some of your altcoin positions into Bitcoin or conventional currency. In this stage of increased risk taking in the market, it probably is a good idea to lock in some profit and start taking risk off the table.
When Bitcoin dominance is low and the overall cryptocurrency market cap has taken a tumble, it might be a good idea to start converting some of your Bitcoin into altcoin positions. By doing so, you are positioning your cryptocurrency portfolio to benefit from an altcoin run and the increasing altcoin valuations comparative to Bitcoin.
These different strategies are certainly worth considering and do have benefits over the conventional HODL strategy so many investors take. After all, the most profitable strategy is generally found by doing the opposite of everyone is.
There you have it, a basic explanation on why Bitcoin drives the cryptocurrency markets. The TotalCrypto team hope that this article has cleared up some of the mystery surrounding this topic. It is a complex area and is certainly subject to change as more and more cryptocurrencies become accessible on exchanges that accept conventional currency deposits (like Coinbase).
Remember that The TotalCrypto Team is here to help you navigate the cryptocurrency markets. We spend every day looking at and analysing the cryptocurrency markets to share our insights with you. Sound interesting? Then subscribing to TotalCrypto’s weekly newsletter is certainly not a bad idea.