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Dynamics of Bitcoin and Altcoins

05 May 2021 | ZebPay Trade-Desk

As BTC crossed the $60,000 mark and made a new all-time of $64,863 in late April 2021, the question on everyone’s mind is, will Altcoins also show a similar trend, and experience the kind of upward movement that BTC has seen, especially over the past year or so. 

Those who have invested and traded in cryptocurrencies other than BTC alone, for a longer time will be aware that the altcoin market’s performance is fairly correlated to the performance of the largest asset by market capitalization, that is Bitcoin. Over the past few years, this made a lot of sense, as BTC dominated the space, as this asset alone made up ~70% of the marketplace’s capitalization. But as the crypto space has started to mature, and volumes among other assets (Altcoins) have seen phenomenal growth and traction, it is worth looking at how this relationship might change in the future. Altcoins have a pretty interesting relationship with BTC — sometimes they jump up in value with Bitcoin, but sometimes their prices remain largely unaffected. Other times, in times of serious market upheaval, the value of altcoins plummet twice as fast as that of Bitcoin’s. Are there any trends one can draw from this? The quick answer for this is No. It is very hard to prove, and draw any concrete conclusion, as an increase in the price of BTC is almost always coupled with large trading volumes that take the spotlight away from alternative assets. However, the first few months of 2021’s price action have seen many altcoins more than double in value, leaving investors in awe of what might be happening in the marketplace.

Let’s look at what has happened over the past year or so. After a rather long wait, BTC broke its ATH and the magical mark of $20,000 in late December 2020, and at the time of writing, it is trading at $57,000. However, last year in 2020, while BTC made new gains and ATH’s, most altcoins did not see the same trend. However, since the start of the year 2021, leading altcoins, such as Ethereum, Litecoin, and XRP (at least until its SEC woes which at one point crashed its price) also experienced strong gains versus the U.S. Dollar and followed the BTC trend, upwards and onwards.

One interesting Bitcoin vs Altcoin contest in the latter part of 2020 was that of BTC vs yearn.finance (YFI). YFI is a fairly new DeFi protocol that skyrocketed last year, overtaking Bitcoin’s price by reaching $40,000. This was primarily due to DeFi’s exponential growth, at the time, and the project’s very small total supply, which created the upward price pressure. Since then, however, Bitcoin reclaimed its top spot, and while YFI still follows suit, BTC is maintaining its price lead.

Ethereum on the other hand took a while to get going in 2020, and then finally picking up momentum in the last quarter of 2020, thanks to the launch of the Beacon chain that kickstarted the migration toward the much anticipated Ethereum 2.0, coupled with the support from Bitcoin crossing the sacred $20,000 mark. Since then, Ethereum catapulted past $1,000, onwards to $2,000 levels, and is currently approaching $3,700 levels at an incredibly fast pace. Interestingly,  many back in 2017 believed that Ethereum would be the first altcoin to beat Bitcoin, but that never ceased to have happened. Instead, ETH continued to drop in value until early 2020, after which its domination has begun, and it is showing no signs of respite whatsoever. 

Hence, one can say with much confidence, that a very strong Bitcoin eventually lifts up its closest followers towards the throne. XRP followed a  similar pattern to Ethereum as well. The cryptocurrency reached an impressive all-time high of $3.84 in January 2018, before it plummeted to just 12 cents over the last year. Since then, however, in 2021, the asset has shown good resilience and growth, gradually making its way back up, and reclaiming its popularity among altcoins, and is currently trading at $1.5 levels. Saved by BTC’s bull run as well as  Flare Networks’ Spark token airdrop in December 2020, XRP went up 70 cents in late November, and during that time, BTC started to flatten and hit a temporary plateau. Immediately after, XRP’s price started to decline, thanks to the SEC suit which made the asset take a big beating, while BTC on the other hand witnessed another rally. The graph below tries to depict this graphically, using the %change in the price of the asset as a variable, over the last nine quarters.

BTC’s momentum cannot always reflect the dynamics of the market entirely, but rather benefits from the first-mover advantage that the leading digital asset historically enjoys. More often than not, BTC’s bullish stance is not in tandem with most altcoins, in a larger more general sense. This has become a rather common occurrence, and a pattern has started to emerge to some extent. Altcoins will tend to pull back during a BTC rally, and after BTC stabilizes, an altcoin uptrend starts, and gradually gains momentum. Like anything else, some expectations exist,  however, much of that is subject to speculation. Generally speaking though, BTC’s rally must consolidate, and ETH’s price needs to break out convincingly before altcoins witness a break-out and start trending towards new all-time highs. ETH’s price plays an important role because Ethereum is probably the most trusted cryptocurrencies apart from Bitcoin. Ethereum has cemented itself as the most trusted altcoin, as the asset basically pioneered the 2017 ICO boom and was also the backbone of 2020’s rise of the decentralized finance (DeFi) space. The demand for DeFi protocol tokens has been instrumental in increasing the altcoin trading volume, and price appreciation.  The table below shows how prices, on a weighted average basis, have moved over a few quarters:

BTCETHXRPLTCYFI
Q1 2019$4,105$142$0.31$61
Q2 2019$10,817$291$0.40$122
Q3 2019$8,294$180$0.26$56
Q4 2019$7,194$130$0.19$41
Q1 2020$6,439$134$0.17$39
Q2 2020$9,138$226$0.18$41
Q3 2020$10,784$360$0.24$46$23,848
Q4 2020$29,002$738$0.22$125$22,738
Q1 2021$58,919$1,918$0.57$198$36,134

An interesting question one might ask is, can altcoins influence the price of BTC? No evidence supports this, and hence the short answer is no; Bitcoin rarely gets boosted by altcoins. The case is as such, once altcoins have rallied, and claimed some form of dominance from Bitcoin, the first cryptocurrency usually swiftly steps in to reclaim its throne, and top the charts in gains. Bitcoin is undoubtedly the gold standard of the crypto industry. It is entirely decentralized and liquid, available on any exchange on the planet. This is what breeds trust with investors. In the case of altcoins, however, most projects who were a part of the 2017 ICO boom have failed, leaving investors in losses. It is said that close to 85% of all ICOs failed, many of them were also scams. Moreover, liquidity plays a major role. Smaller, less popular altcoins suffer from the lack of market liquidity, hence can be subject to market and price manipulation from larger investors, contributing to its volatility. 

On a concluding note, the market has endured several cycles of booms and busts, and new institutional players are now entering the space as the market has started to mature. These investors are betting largely on Bitcoin and less on altcoins. This is driving the momentum in Bitcoin’s favour, and it is likely to be a while before the trend discontinues, and BTC alone can up-lift altcoins to the same extent.  Ethereum on the other hand is seen as the second pillar in the crypto community and leads the altcoin market. The bull run for Ethereum could be the push altcoins need to see a historical rally this year. As Ethereum is the king of all decentralized systems and is due for an upgrade in the near future, altcoins face the mammoth task of catching up and stealing Bitcoin’s market share.

References:

https://coinmarketcap.com/

https://www.coindesk.com/

https://consensys.net/
Disclaimer : This report is not intended to be relied upon as advice to investors or potential investors and does not take into account the investment objectives, financial situation or needs of any investor. All investors should consider such factors in consultation with a professional advisor of their choosing when deciding if an investment is appropriate. The Company has prepared this report based on information available to it, including information derived from public sources that have not been independently verified. No representation or warranty, express or implied, is provided in relation to the fairness, accuracy, correctness, completeness or reliability of the information, opinions or conclusions expressed herein. This report is preliminary and subject to change; the Company undertakes no obligation to update or revise the reports to reflect events or circumstances that arise after the date made or to reflect the occurrence of unanticipated events. Trading & Investments in cryptocurrencies viz. Bitcoin, Bitcoin Cash, Ethereum etc.are very speculative and are subject to market risks. The analysis by Author is for informational purposes only and should not be treated as investment advice.

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