Why Does Bitcoin Lead the Crypto Market?
Without any doubt, Bitcoin is the biggest, most popular, and leading cryptocurrency in the crypto market.
Since its inception in 2009, Bitcoin has brought about the existence of a robust cryptocurrency market, more than the pioneers of the Bitcoin cryptocurrency had imagined.
Bitcoin investors witnessed an undeniable jump in value in 2017. The success that Bitcoin achieved has led to the creation of many spin-offs and imitations that were fashioned to have almost the same utility as Bitcoin.
Numerous cryptocurrencies have been launched, and many are still under development, all in an attempt to recreate the success rate of Bitcoin.
These Altcoins, coined from "alternative coins," are any other cryptocurrencies apart from Bitcoin (to some people, this also includes Ethereum), and many of these Altcoins are forks of Bitcoin (or Ethereum, as the case may be).
Despite the differences in their governance, use cases, and powering of data oracles, the value of Altcoins moves intimately in close relations to that of Bitcoin. Why is this? And why does Bitcoin always lead the crypto market ahead of Altcoins?
Reasons Why Altcoins Follow Bitcoin
According to the CEO of Wyre (a crypto infrastructure provider), Michael Dunworth, it is normal for there to be a leader where there are multiple entities, and these entities will follow the leader because, as he says, "they are all connected."
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Briefly explained below are some of the reasons why Bitcoin Leads the crypto market and Altcoins follow:
1. Most Altcoins Are Clones or Forks of Bitcoin
As was mentioned earlier, several Altcoins are forks of Bitcoin, while others are essentially clones of Bitcoin. These alternative coins operate on a similar consensus mechanism, that is, the Proof-of-Work (PoW) protocol.
For a clearer context, Litecoin, the first altcoin adopted by the mainstream crypto community, uses a copy of the original Bitcoin source code.
The goal the Litecoin project hoped to achieve with this is to become a faster and much lighter version of Bitcoin. More than half of the Altcoins in circulation today are clones of Litecoin, which is a rip-off of Bitcoin.
For this reason, it is most obvious that the value and reputation of Bitcoin will affect these offshoots called Altcoins. As the price of Bitcoin increases, that of Altcoins will follow suit a bit, and if the price goes otherwise, Altcoins will also experience the same.
2. Bitcoin Was The Base Cryptocurrency For Trading Pairs
Right before there were so many cryptocurrencies as we have today, Bitcoin had already established itself as the largest and most engaged e-currency by a significant margin.
Following Bitcoin's launch into the financial market, many Altcoins were created to serve as alternative cryptocurrencies to Bitcoin.
For this reason, cryptocurrency exchanges listed trading pairs of Altcoins against Bitcoin. It was not until way into 2017 that a few more reliable stablecoins were made widely available and included in trading pairs.
This Bitcoin trading pair factor allowed for a dynamic where new investors first need to fund their trading accounts with Bitcoin. This process consequently contributes to the increase of the Bitcoin price.
Most of the early altcoins were purchased or exchanged with Bitcoin. This exchange of Bitcoin for a particular Altcoin is one of the major reasons for the obvious high correlation between Bitcoin and Altcoins, with the former always leading the pack.
However, this factor is not one of the major determinants or reasons Bitcoin leads the crypto market because there are more stablecoins available these days. These stablecoins have also been widely adopted for trading pairs.
3. Bitcoin is A Crypto Market Sentiment Indicator
That Bitcoin affects other cryptocurrencies and ultimately determines their values is popular knowledge that is generally accepted as a fact.
For clearer context, when there is an instance of a sudden rise in the price of Bitcoin, many crypto traders will take that as an indication that the price of Altcoins will follow suit, and they decide to purchase them quickly.
It is a common phenomenon amongst traders and crypto enthusiasts generally to use the price movement of Bitcoin as a general crypto market indicator. The rationale behind this can be considered correct because it has often proved correct.
The buying pressure that altcoins witness after every BTC price jump will consequently enable the prices of Alt/USD to pump.
The loss or gain of Bitcoin in the crypto market is seen as an indication of the probable success of other coins. In simple terms, the success or failure of Bitcoin is both a yardstick and a blueprint for the failure or success of Altcoins.
This trend, whether up or down, has proven to be very established that when the price of BTC increases against the USD, it immediately triggers the acceleration of the demand for Altcoins by sophisticated trading institutions.
4. It Has The Most Secure And Decentralized Network
Of all alternative coins, Bitcoin is the most secure one. The Bitcoin network is based on a proof-of-work (PoW) consensus mechanism that is regulated by millions of Bitcoin miners all around the world.
The miners, which is the most by any crypto network in the world, participate and contribute to ensuring the Bitcoin blockchain is completely decentralized.
The level of decentralization on the Bitcoin network is higher than that of the other cryptocurrencies, and this is because of the volume of participants working on the network.
Utmost decentralization on the Bitcoin blockchain ensures that users' assets and transactions are protected with flawless security systems.
Bitcoin is most crypto Investors and e-commerce merchants' first choice of crypto, considering it is built atop the most secure database.
5. Bitcoin is The Best Known Cryptocurrency
Ever since cryptocurrencies and digital assets have come to be, Bitcoin by far remains the best-known cryptocurrency yet. Some people (especially those not into crypto) see Bitcoin as synonymous with the whole cryptocurrency market.
One of the reasons for Bitcoin's lead in the crypto market is its popularity. Bitcoin outranks every other coin in popularity, and this is a result of its unique features and benefits, as well as its credibility and longevity.
The Bitcoin network, which also happens to be the largest blockchain network, enjoys the social acceptance of the majority of crypto users.
One of the factors that contribute to the popularity of Bitcoin over other coins in the crypto market is that retail and institutional investors consider it to be the most legitimate and trustworthy cryptocurrency.
The Crypto Market Cap And Bitcoin's Dominance
Bitcoin's dominance is determined by measuring its total market capitalization in relation to the market capitalization of the general cryptocurrency market.
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The dominance of Bitcoin on the crypto market capitalization is simply the amount of presence Bitcoin exhibits in the cryptocurrency market.
The base reason why Bitcoin leads the cryptocurrency market, and other altcoins follow is because general crypto prices are typically measured in Bitcoin due to its market cap dominance.
The formula, Bitcoin dominance ratio = Bitcoin market cap/Total cryptocurrency market cap, is used to calculate the dominance ratio of Bitcoin.
In 2009, Bitcoin commanded 100% dominance of the crypto market cap. Bitcoin was able to attain total dominance because, at the time it launched, it was the only cryptocurrency on the market.
In 2022 however, the dominance of Bitcoin in the crypto market capitalization is 39.8% as at the time of writing, more than double that of Ethereum, its closest competitor, which sits at 17.6%.
Bitcoin's dominance in the crypto market can not be denied even in the least instance. Its influence over other coins in the crypto market is obvious, as more than a handful of altcoins can not be bought directly using fiat currencies.
To own most of the Altcoins on the market, buyers would have to first of all purchase some Bitcoin, and it is this Bitcoin that will then be swapped with a selected Altcoin on any crypto exchange that offers such.
In instances of an Altcoin holder who wants to dump their coins or switch to another Altcoin, it is most likely that they would have first to convert their assets to Bitcoin, then sell BTC for fiat currency if they wish to dump the coins or they can swap the BTC for another Altcoin.
The symbiotic relationship that exists between Bitcoin and Altcoins is chiefly responsible for the price of different cryptocurrencies being tied to that of Bitcoin.
Anomalies In Crypto
When leveraged investors close out a large portion or all of their assets, the biggest problem that the crypto markets battle is the market's overall liquidity.
Most of the time, in this instance, there is no large number of buyers waiting to buy the unloaded assets, just like it happens in the stock market.
The unloading of large amounts of coins is one of the reasons why the weekend is always the time that most crypto crashes take place because, at that time, there is a fewer number of crypto traders on the ground to buy the coins.
For example, when an investor who also happens to be one of the biggest holders of a given asset decides to dump the majority or all of that particular asset, the crypto market becomes flooded.
It is for this reason that Vice President of Strategy at Early Investing, Vin Narayanan, gives why big institutions would rather not trade small coins. According to Narayanan who is also the CEO of Vinistic Gaming, "they wind up upsetting the markets."
What The Future Holds For Bitcoin And Altcoins
The trend of altcoins following Bitcoin is a long-established one that has been happening since these coins were fashioned after Bitcoin.
However, there are questions as to if there is any possibility of Altcoins not following Bitcoin in the future. To decipher what the future holds for Altcoins, it is necessary to understand the underlying features of cryptocurrencies.
According to Tom Lee, an expert in the crypto industry and co-founder of Fundstrat Global Advisors, Altcoins are expected to surge very soon. Tom Lee believes that Altcoins hold the potential to win against Bitcoin in the future eventually.
The establishment and age-long reputation of Bitcoin in the crypto-verse helped cement its spot as an industry leader that dictates the demand and price movements of other altcoins.
The crypto market, however, appears to be in a maturation stage, and a possible chance of Bitcoin losing its market dominance looks unavoidable as the crypto community begins to find other blockchain technologies and crypto tokens trustworthy.
Prior to the latest development, which saw people gaining more trust in Altcoins than ever before, a very small shift in the price of Bitcoin could send shockwaves and upset any present trend in the entire cryptocurrency market.
Now, with what seems to be changed in the dependence on Bitcoin, participants in the crypto market have become less reliant on Bitcoin sentiments.
Many Altcoins can now be purchased with fiat currencies or other stablecoins like Tether (USDT), Binance USD (BUSD), USD Coin (USD ), Paxos Standard (PAX), etc.
Their compatibility with more assets aside from BTC reduces their dependency on Bitcoin. We can not tell what this will portend for Altcoins in the future, whether they will continue following Bitcoin or not.
If the general cryptocurrency market is going to develop, it will need to leave the shadows of Bitcoin and establish a new system of Altcoins that can independently determine their values.
Will Altcoins leaving Bitcoin's shadow be a near future phenomenon, or will it take much longer than imagined? That, we can not say for sure yet as the crypto market is a very volatile one that can not be correctly predicted 100%, not even 90%.
It is important to keep in mind that although cryptocurrencies appear to be different in very many ways, they still tend to be very dependent on each other.
The cryptocurrency market is so closely knit within each other that when a particular currency begins to rise or plunge, another coin will likely follow suit. With Bitcoin, the leading cryptocurrency, its effects are more general as it affects a majority of Altcoins.