Does Bitcoin Have An Impact On Altcoins?

“Wall Street sneezes, and Europe catches a cold.” What’s true of stocks on either side of the Pond is also true of bitcoin and the altcoins. Kind of…

Sterling hasn’t had a good year. Against the dollar, it’s down from its $1.43 high in April to $1.29 at the time of writing. The reasons? A few things, but a lot of it is down to that little matter of Brexit you may have heard about in the news, and the perceived odds of the country being cut adrift to fend for itself after March next year. But at the same time, the stock market is storming ahead. Every time the pound takes another beating, up goes the FTSE. Right now it’s not far off its all-time highs.

There’s no great mystery to this. The FTSE100 is composed of big international corporations, and their revenues come in many currencies – largely US dollars. And if Sterling slides, dollars can buy more pounds. The dividends those companies pay, and the companies themselves, become worth more of a less-valuable currency.

Less of more.

And so it is with bitcoin and the altcoins, at least under normal market conditions. If the markets aren’t experiencing particularly big swings in value, then if bitcoin moves higher, there’s a good chance the altcoins will drop in BTC terms.

What’s going on here is that altcoins trade predominantly against BTC (i.e. these are crypto-to-crypto exchanges), and BTC trades predominantly against the dollar. So if bitcoin rises in value, in order to maintain the same USD value, altcoins need to drop in terms of BTC. Traders talk of altcoins being ‘pegged’ to bitcoin, in the sense that a move for bitcoin will necessarily entail a move for altcoins. If more altcoins traded directly against the dollar rather than BTC, it might be different, but for now, BTC remains the major on-ramp for altcoins.

All that’s really going on here is that money is being recycled from one currency to another. This is why so many ICO tokens suffered at the end of 2017. The projects had crowdfunded money in BTC and issued tokens. The holders of those tokens saw the value of BTC going up, and decided to sell them to release their BTC in anticipation of further rises. This drove down the BTC value of the tokens, if not their USD value, leading to much wailing and hand-wringing for those who think in BTC terms. Unfortunately for them, the altcoins were marching to the beat of BTC’s drum. Until we see more fiat on-ramps, that’s what they will continue to do.

Bitcoin sneezes.

That’s broadly what tends to happen under fairly normal market conditions. There’s another scenario we’ve seen a lot more of over the past few months, and it’s been pretty unsettling for alt holders. That’s where altcoins move in the same direction as bitcoin, just a whole lot harder and further.

Something similar-but-different is going on in these circumstances. The crypto markets are volatile and highly sentiment driven. Greed and fear play major roles. Order books are thin, compared to conventional markets, so a little bit of buying and selling can shift price further than it would elsewhere. When a big move looks like it’s underway, traders position accordingly.

Imagine what happens at the top of a bubble, as we saw in December 2017. Traders realize bitcoin has topped out, and rush to sell before too many more people get there first and they’re left holding something worth a fraction of the purchase price. In bitcoin’s case, that fraction is around a third: it has lost around 65 percent of its value since the all-time high.

So what of alt holders? Their coins are falling in value too because they’re denominated in BTC and bitcoin is plummeting. Even if they hold their value in bitcoin terms, the altcoins will fall in USD terms on those grounds alone. So traders sell their altcoins, and then quite possibly sell the bitcoins too.

That means altcoins have come under double pressure. Their BTC value is being driven down, and BTC’s own value is being driven down. It’s like trading with leverage: the effects are multiplied. Worse still, the altcoins’ order books are far thinner than bitcoin’s – they can’t absorb many sells – so they’re even more volatile. Under these circumstances, the altcoins can act like a turbocharged version of bitcoin.

It’s BTC squared: if bitcoin drops to a third of its value, altcoins can drop to a tenth of theirs. That’s exactly what we’ve seen in many cases, though some larger coins like Ether haven’t suffered so badly. Even then, ETH topped out at just under $1,400 and is currently trading at $360, almost a 75 percent drop. Litecoin is down more than 80 percent. DASH, the largest privacy coin, has taken nearly a 90 percent hit.

So the old stock market saying might be adapted: ‘Bitcoin sneezes, and altcoins go on life support.’

The bright side?

The good news is that the same thing happens on the way up, too. When money is moving into the whole sector in large amounts, as it did last year, it spills out of bitcoin into altcoins that have already hit rock bottom and that traders now deem undervalued. Given their thin order books and the rising price of BTC, that tends to move the needle in style.

Of course, all of this can be pretty scary if you don’t know what’s going on. Sometimes the best way to win the game is not to play. If the market’s getting rough and you don’t want to risk making a bad call, it can be best to park your funds in fiat. Fortunately, Uphold makes that really easy, allowing you to sleep at night.