Does the Recent Growth of Altcoins Indicate Independence From Bitcoin

  • 14.11.2019

Altcoins have been on the rise compared to Bitcoin lately. So, does this mean that they are becoming more price-independent from the world's number 1 cryptocurrency?

The market dominance of Bitcoin has fluctuated constantly since altcoins started popping up. However, the price of altcoins has always been heavily correlated to the btc price. Let's take a look at why that is the case, and if we can expect the decoupling trend to continue into the long-term.

The Bitcoin-Altcoin correlation

Bitcoin has been the market leader in cryptocurrencies for a long time. When the price of Bitcoin goes up, so do the prices of most other cryptocurrencies. When it goes down, they also usually follow suit. In fact, many take the price of Bitcoin ( BTC) as a proxy for the cryptocurrency market as a whole. A quick look at a chart of the correlations between cryptocurrencies shows that this is certainly the case.

One reason for this is that cryptocurrencies can be easily traded between each other. In general, the more difficult it is to trade between two assets, the less correlated they become. It's easy to trade crypto-to-crypto but much more difficult to trade crypto-fiat. This adds to the coupling of the two.

However, a much deeper reason for this is that most investment in cryptocurrencies is still based on speculation rather than real usage. People that want to get into crypto usually buy the biggest and best token, which is Bitcoin, first. They diversify into altcoins to gain exposure to the whole market.

This gives Bitcoin an overinflated price that strongly leads the other tokens. Some think of Bitcoin's role in the last few years like the USD in the global financial system. There are many currencies, but there is just one global reserve currency against which everything else is measured.

However, if you take a deeper look at the Bitcoin-altcoin correlation chart, you'll see it also suggests that the correlation peaked in 2018, and is now slowly declining.

The decoupling of Bitcoin and Altcoins

It would be a huge step in the cryptocurrency market for Bitcoin and altcoins to truly decouple. It would mean that big price changes in Bitcoin wouldn't necessarily mean the same in the altcoins market. So what would need to change for this to occur?

For this to occur, the blockchain world would have to grow and diversify in its applications. Right now, it's likely that someone who owns Bitcoin also owns other altcoins and vice versa. That means people usually buy and sell them at the same time as the market expands and contracts. To reverse this, the crypto world should be filled with much more independent sectors.

Beyond just currency

One of the key factors that could drive the decoupling of Bitcoin and altcoins is when blockchain network applications are developed beyond just currency. Of course, many of the newer blockchain networks like Ethereum are capable of running powerful applications well beyond what the Bitcoin network can do. But, these decentralized blockchain apps (or Dapps) aren't heavily used yet.

Ethereum Dapps are becoming more widely used, and other unique networks like Ripple, Stellar, Hyperledger, and others are finding their own ways to become useful in their own right. As this process accelerates, the demand for altcoins will develop further than just crypto speculation, and the price of altcoins will become more and more independent of Bitcoin.

Changing of Bitcoin's role

As this process of diversifying applications continues, Bitcoin's role in the crypto economy will likely shift. In fact, we can already see that shift happening.

Bitcoin is the most popular blockchain network by far, but it's not the most user-friendly network. Transaction throughput is very limited, with the network only managing to process around 34 transactions per second. This is significantly lower than the demand for Bitcoin transactions and is why the Bitcoin network consistently has very high transaction fees. This creates friction in using the Bitcoin network as a day-to-day transaction network.

As this trend continues, it looks like Bitcoin is going to take on more of a 'store of value' type role in the crypto economy. Similar to what gold is for traditional investments. We can already see this starting to happen as Bitcoin is becoming more correlated with gold and less with altcoins.

If people are buying up bitcoin for the main purpose of holding on to it for the long term, its price will likely stabilize compared to altcoins. As the price does stabilize, it will become an even more attractive long-term investment, creating a feedback loop that puts Bitcoin in a price class of its own.

The timeline

It's likely that as altcoins develop and find their own unique use cases in the real world of finance, their prices will become less pinned to the Bitcoin chart. This will be a great thing for cryptocurrency investors as their assets will be more diversified.

But the complete decoupling of the two probably won't happen too quickly. Right now, the price of Bitcoin and altcoins is still highly correlated. Even with the recent growth in altcoins. The cryptocurrency market is still young and volatile. There is a very long way to go before blockchain technology underpins the whole global financial system.

If you're investing in cryptocurrencies right now, don't expect altcoins to take too much of Bitcoin's territory in the next few months. In the next few years on the other hand, who knows?

Always invest wisely

It's very hard to predict what's going to happen in the world of crypto. It's even more difficult to pick which crypto tokens are going to take off, and which ones are going to collapse. Make sure you proceed with caution when investing in Bitcoin and altcoins. Invest only what you can afford to lose and you won't run into too many problems.

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