Altcoins and Bitcoin Price Movements

With extensive experience as an electrical/software/coding engineer along with having a diverse financial background, Thomas Wettermann’s areas of interests include Machine Learning (ML), artificial intelligence (AI), and Financial Technology (FinTech). For the past few years, Thomas Wettermann has focused on the underlying technologies that support and promote all phases of cryptocurrency ecosystems. 

How Do Altcoins Move in Relation to Bitcoin?

With Bitcoin being the original cryptocurrency, do altcoin prices move relative to Bitcoin’s price movements? Well, it appears that a 2019 academic paper answered this question in the affirmative. That is, at least certain types of altcoins follow the price movements of Bitcoin.

The question is: why do some altcoins move with Bitcoin? Several reasons have been proposed.

First, practically all centralized exchanges use Bitcoin as a primary trading partner or trading pair for other cryptocurrencies. So, for example, if you wanted to trade your Litecoin (LTC), you had to trade it for the most popular crypto - Bitcoin. Therefore, to trade for LTC, you had to purchase Bitcoin first to then trade for LTC. Purchasing Bitcoin would drive its price up, and the subsequent purchase of LTC would drive its price up as well.

Second, Bitcoin was the original cryptocurrency and is by far the number one cryptocurrency based on market capitalization. If the original, number one cryptocurrency Bitcoin experienced a bullish market move, this was perceived as bullish news for the remainder of the crypto marketplace.

One accepted measure of this market interrelationship between Bitcoin and the rest of the crypto marketplace is the Bitcoin Dominance Ratio.

Bitcoin Dominance is a metric used to understand the interplay between Bitcoin and altcoins. An important characteristic of this computed ratio is that it can help investors understand if altcoins are in a downtrend or uptrend against Bitcoin.

The Bitcoin Dominance Ratio is computed as the ratio of Bitcoin’s Market Capitalization to the Cryptocurrency's Total Market Capitalization.

Therefore, when the Bitcoin Dominance increases, altcoins will be expected to lose value against Bitcoin. Similarly, when the Bitcoin Dominance decreases, altcoins will be expected to gain value against Bitcoin. 

Generally speaking, Bitcoin will lose market dominance in bullish markets since investor interest in altcoins grows at the expense of Bitcoin in bullish markets. Similarly, Bitcoin surging versus the altcoin market cap is typically a bearish market signal.

1-Year Market Cap Bitcoin Dominance (source: tradingview.com)

To gain a general understanding of this ratio, note the 1-year Market Capitalization Bitcoin Dominance graph reproduced above.

As can be seen, altcoins underwent a bearish trend since the start of 2022 where the Bitcoin Dominance increased from about 40% to its current value of about 42%.

If you are interested in investing in either Bitcoin or altcoins, you may find the following table informative as to how you can apply purchase or sale signals based on the Bitcoin Dominance ratio.

Bitcoin Dominance: Bitcoin’s Price: Potential Investment: Increasing Price increasing Purchase Bitcoin Increasing Price decreasing Liquidate altcoins Decreasing Price increasing Purchase altcoins Decreasing Price decreasing Liquidate Bitcoin

Another reason that altcoins tend to move with Bitcoin is that many traders make their decisions to enter or exit crypto-related trades based on the fluctuations of Bitcoin’s price. If Bitcoin’s price goes up, traders will purchase altcoins on the belief that if Bitcoin’s price is bullish, other altcoins will follow suit and also trend higher.

In addition, some derivative Bitcoin-related altcoins are structured to mirror Bitcoin’s ecosystem. Therefore, these derivative-styled altcoins typically follow Bitcoin’s price action. Bitcoin-related altcoins include Litecoin, Bitcoin Cash, Bitcoin Gold, and Bitcoin Diamond.

Take, as just one example, Litecoin (LTC). Litecoin was established in 2011 as a peer-to-peer (P2P) cryptocurrency and is considered by many to be the first “alternative” coin to Bitcoin’s open-source code.

Since its introduction, Litecoin has slowly moved down to 21st place in the rankings despite its respectable current market capitalization of almost $8 billion.

Litecoin’s original design purpose was to become a cost-effective and faster processing blockchain alternative to Bitcoin. Indeed, Litecoin forked off of Bitcoin’s original codebase.

When Litecoin was first launched, Litecoin’s founder Charlie Lee referred to his trimmed down version of Bitcoin as “the lite version of Bitcoin.” 

1-Year Price Comparison Litecoin versus Bitcoin (source: yahoo.com)

As can be seen from the comparison chart provided above, there appears to be a close correlation between Bitcoin’s price action (blue) and Litecoin’s price action (red).

Conclusion

Altcoins are alternative options to Bitcoin, the number one cryptocurrency. These coins might be a good investment but it depends on an understanding of the different types of cryptocurrencies and someone’s investing objectives. Altcoins can carry a substantial risk where the less established altcoins (such as meme coins) generally pose the most amount of risk. And stablecoins carry the least amount of risk. Before investing in any altcoins, be sure to do your research, just as you would with any traditional security. As they say in crypto, DYOR: do your own research.

All the views expressed on this site are those of Thomas Wettermann and do not represent the opinions of any entity whatsoever with which Thomas Wettermann has been, is currently, or will be affiliated.

Trading digital financial assets such as cryptocurrencies can carry a high level of risk, and may not be suitable for all investors. Before deciding to invest, purchase, and/or trade cryptocurrency you should carefully consider your investment objectives, level of experience, adversity to risk and volatilities. The possibility exists that you may sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with cryptocurrency trading, and seek advice from a qualified and independent financial advisor.

Thomas Wettermann is not an independent financial advisor. Any opinions, news, research, analyses, prices, or other information contained on this website is provided as a general market commentary of Thomas Wettermann and does not constitute investment advice. Thomas Wettermann will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. All opinions expressed on this site are owned by Thomas Wettermann and should never be considered as advice in any form.