How Bitcoin and Ether Affect the Price of Major Altcoins
As the two largest cryptocurrencies in the world, Bitcoin and Ether are perceived as tokens that can have a meaningful impact on how the broad market will perform. This topic is complex and can depend on various factors, which is why Markets Legion would like to dig deeper into it, especially now when the market had been more turbulent, making it difficult to predict what could happen next.
Bitcoin and Ether dominate the crypto market
With a market capitalization worth $666 billion and $283 billion respectively, Bitcoin and Ether account for almost two-thirds of the global cryptocurrency market, showing their dominance is still untouched by other promising projects such as Cardano, Polkadot, or Uniswap. Since most of the funds are concentrated into two tokens, one could argue that their performance could have an impact on how smaller altcoins can perform.
A barometer for risk?
Many market experts view Bitcoin as a barometer for risk, mainly because the correlation with the altcoins market is most of the time positive. When BTC is rising, the rest of the market follows on the same path, as the sentiment improves and bullish speculative flows kick in. Online trading among retail traders and institutions intensifies and all act as a self-reinforcing pattern, creating more buying until a breakpoint occurs.
A similar situation occurs when Bitcoin and Ether start to sell off. The market views this as a sign of weakness and thus the selling extends to the broader altcoins market. Due to higher volatility, these tokens will generally suffer more.
The recent crypto market selloff is a great example. Both Bitcoin and Ether had dropped during May 2021, but the damage for small altcoins had been more severe, with losses reaching more than 70% in some cases.
Understanding the flow-driven mechanisms
There are a variety of cryptocurrency instruments available for trading at Markets Legion, which makes it imperative for traders to understand how flows are shifting from one side of the market to another, so they can adjust their trading strategy accordingly.
Starting with March 2020, the crypto market sentiment had gradually improved and the most-favored cryptocurrency had been Bitcoin. As the price got close and eventually broke above the all-time high, the rest of the market started to play catch-up, with flows shifting towards altcoins that were cheaper and had higher potential for growth.
Ether had also jumped above $4,000 per token for the first time in history, as the exuberance showed no signs of abating. The Bitcoin dominance dropped between January and May 2021, communicating capital had been moving into other tokens.
When the May 2021 broad market selloff had started in Bitcoin, the altcoin market posted massive losses, and the BTC dominance recovered slightly, which means Bitcoin had been treated as a safe placement during a time when market participants had no clues on how severe the selloff could be.
Does it mean altcoins depend solely on BTC and ETH?
Based on all the aspects discussed, it turns out that large price action moves in Bitcoin or Ether can influence the broader market. If these tokens are rising impulsively, the risk sentiment in small altcoins can be influenced. The same goes when BTC and ETH are falling, pushing the entire market lower in tandem.
However, that does not mean Bitcoin and Ether are the sole denominators in the cryptocurrency space. Each project is unique and the price action performance can be influenced by a broad number of factors. Traders will have the difficult task of figuring out why valuations are performing in any given way.
