At the end of the day, Bitcoin is king. Ever since its inception, it has remained the number one cryptocurrency. With this power comes extreme influence on the market.

More specifically the effect on altcoins. Bitcoin either destroys them or allows them to flourish. But you may be wondering, why does Bitcoin affect altcoins?

Don’t worry. In this article, I will be answering that question and much more. So without further ado, let’s jump right in.

TL;DR: 

Altcoins are affected by Bitcoin as it holds over 40% of the market share. With this market share comes great influence. It indicates overall sentiment and the probability of success which investors then use to trade altcoins. Ultimately, if Bitcoin succeeds so will altcoins and vice versa.

Why does Bitcoin affect altcoins?

Bitcoin affects altcoins as it is the market leader. It represents over 40% of the total market cap of cryptocurrencies and therefore is a reflection of the overall market.

It is synonymous with crypto and therefore investors use it to determine the success of the industry as a whole for better or worse.

Essentially, Bitcoin is used to gauge sentiment and the probability of the market succeeding. Ultimately, if Bitcoin succeeds so will the whole market and vice versa.

Not to mention, as altcoins have less liquidity they are more volatile. In other words, it takes less capital to move altcoins relative to Bitcoin.

For instance, if bitcoin increases by 10% a corresponding altcoin may move by 50%. You can view them as a leveraged bet on Bitcoin.

This creates a self-fulfilling prophecy as traders purchase altcoins after a Bitcoin move in hopes of generating an even greater return from the upcoming altcoin move.

Many altcoins also trade against Bitcoin. Popular exchanges such as Binance and Coinbase offer Bitcoin trading pairs whereby there is a direct transfer between altcoins and Bitcoin.

Therefore, for traders to fund their accounts they have to buy Bitcoin which increases the price and then they transfer it to altcoins also increasing the price.

How does Bitcoin dominance affect altcoins?

Bitcoin dominance is a measure of the share of Bitcoin’s market cap relative to the total market cap of all cryptocurrencies. Therefore, if Bitcoin’s dominance increases then it is outperforming altcoins on average.

In most cases, this happens in bear markets as people move to Bitcoin as a means of safety. Whereas, if it decreases then altcoins are outperforming on average therefore there is a greater opportunity cost of holding Bitcoin.

This primarily occurs in bull markets as people take on more risk.

Does Bitcoin affect all altcoins?

Although Bitcoin affects most altcoins there are some exceptions. One notable example is the crypto oracle Chainlink. During the 2018 to 2020 bear market it increases over 6000% relative to Bitcoin.

Moreover, stablecoins do not follow Bitcoin as they are pegged to FIAT currencies such as the US dollar. Also, cryptocurrencies such as PAX gold don’t follow either as they can be redeemed for commodities.

That being said, these are the exceptions to the rule and most altcoins follow Bitcoin.

Will altcoins always follow Bitcoin?

In my opinion, altcoins will not always follow Bitcoin. Even now the correlation between Bitcoin and altcoins is decreasing. Trading is moving away from Bitcoin to stablecoins and Bitcoin dominance continues to decrease.

Back in 2017, Bitcoin dominance was over 90%, now it is 40%. With this decline has come a decreasing influence on the market. Moreover, as time goes on this will only continue as more emerging sectors and technologies take market share away from Bitcoin.

If you want to view this article in a more visual format then please check out my video below:

Conclusion

As you can see, Bitcoin affects altcoins thanks to its market cap relative to altcoins. Overall, it represents over 40% of the market and therefore sways the market in both bull and bear trends.

In bull markets, bitcoin signals confidence to traders, and therefore they are encouraged to invest in riskier altcoins. While the opposite happens in bear markets.

Not to mention, altcoins are often traded against Bitcoin which has further added to the correlation. I hope you found this article useful and thanks for reading it.

Want to learn about the Bitcoin Whitepaper? Click here to read my previous article.