The Great Tug of War Between Bitcoins and Altcoins
Regardless of how outdated bitcoin has or will become, no one can ever say it wasn’t first. The lofty title of “King Coin” is well-deserved, because bitcoin represents the small, localized storm that eventually created enough turbulence to become a veritable tsunami of investor interest. The cryptocurrency market, which now boasts a total capitalization of around $400 billion, can thank bitcoin for capturing and holding the world’s attention for years, and building momentum that once-infant projects like Ethereum piggybacked on. There is now a bustling market of altcoins that rode in on bitcoin’s coattails, with ambitions of achieving a highly valued token and thriving community like their common patriarch.
These altcoins, no matter how robust or impressive their utility, will always be second to bitcoin. A dichotomy in more than sentiment, the technical relationship between bitcoin and altcoins also highlights their unique relationship. Bitcoin and virtually the entire altcoin market have a curious inverse relationship—when bitcoin is rising in fiat value, altcoins are falling. Experienced cryptocurrency investors recognize this phenomenon and can capitalize on it, but it shouldn’t be considered a surety. For a more informed trading strategy, it helps to understand the impetus behind bitcoin’s mysterious connection with the altcoins it has spawned.
Principal Investment Medium
Bitcoin is the de facto currency for investing in other cryptocurrencies. The industry is still young and admittedly stratified, lacking the seamless interoperability that blockchain can supposedly attain, so bitcoin acts as a funnel for fiat money into the greater altcoin market. There are few exchanges that allow traders to connect a fiat bank account, but they only sell the most mainstream cryptocurrencies: bitcoin, Ethereum, and sometimes Ripple or Litecoin. Bitcoin is also easily purchased on sites like Localbitcoins.com or mined. To invest in newer altcoins, there is a larger variety of exchanges that operate using bitcoin as a financial medium exclusively.
These exchanges are no longer niche, and can make millions of dollars in bitcoin each day without introducing fiat into their ecosystem. Traders must use blockchain infrastructure like wallets to send bitcoin to the exchange, and then they can use it to buy altcoins denominated in BTC, like Stellar Lumens (XLM), Request Network (REQ), Cardano (ADA), and countless others. When these traders want to close their position, they sell these altcoins in exchange for bitcoin. Therefore, demand for altcoins feeds demand for bitcoin. Many prefer to keep their returns in bitcoin instead of transferring back to fiat, if they can, because they can be faster to reestablish new positions when opportunities in the altcoin market arise. This notion speaks to the speculative bond that bitcoin and altcoins share.
Altcoins as a Bitcoin Booster
There are many ways to accumulate more bitcoin. Obviously, one can buy it with fiat money from an exchange, or even in cash, but for those who have already spent everything they’re willing to lose, there are other options. Buying bitcoin low and selling it high is one way though it’s difficult to accomplish. A riskier, yet more lucrative method is to invest in altcoins. Because altcoins and bitcoin are swayed by news cycles and not on concrete, anchored value, people can move between altcoins and bitcoin for the purposes of gaining more bitcoin. This is accomplished via the bitcoin-based exchanges mentioned earlier.
For example, Basic Attention Token might reach a crucial milestone set out in its road map, such as the release of its Brave internet browser, sending the price of BAT up demonstrably. By selling bitcoin for BAT, traders can take a position with their bitcoin that gains significantly more in the same period than bitcoin itself. Altcoins are universally less expensive in terms of fiat money than bitcoin, so their moves upwards (or down) are more pronounced. With a 2BTC investment that rises 50%, a savvy trader can earn 1BTC (the equivalent of over $10,000 in today’s prices) in mere hours.
This functional and speculative relationship, as well as the sentimental and economical differences between them, is why bitcoin and altcoins feed off each other in a cyclical manner. It can almost be likened to an equity market where people can buy “blockchain stocks”, but when they sell the stock they get an asset that essentially mirrors the movements of the entire market, instead of cash. An older and much more expensive coin, when it’s bitcoin’s “turn” to boom, it takes much more money and volume to move, sapping strength from all but the most resilient altcoins.
Battling vs Bitcoin
Some altcoins cannot be considered ‘alternative’ any longer. They’ve differentiated themselves, proven their use cases, or otherwise relied on strong underlying value to resist the pull of the almighty bitcoin. While it’s still a fact that a crashing bitcoin brings the entire market down as well, it being a barometer for cryptocurrency sentiment, its correlation with some altcoins is stronger than with others. Ethereum, for example, has a value proposition leagues removed from bitcoin’s, and it has been known to diverge from bitcoin’s chart frequently.
Up-and-coming coins, and even some that haven’t yet been released, are also likely to demonstrate resistance to the trends of bitcoin. NEO, for instance, is like Ethereum but shores up some of the flaws that make developing on ERC20 a precarious endeavor. Part of the resilience of NEO is also that holders earn dividends, in the form of GAS, which is also used to power smart contracts built on the platform. The market will also bear witness to a plethora of new tokens issued in the upcoming year—many with strong use cases designed to recycle value and create their own economies, rather than capitulate to the gravity of bitcoin.
Among them, standout entrants include Coinseed, which helps people invest in cryptocurrencies using the spare change they collect (digital or physical), and then build a portfolio that can be compared with others. HoToKeN is another promising upstart already in use in Thailand, which promotes a healthy cycle of value between retailers and their customers. For acting as advocates on social media, posting images, and other specific value-added activities, retailers will reward HTKN that will be redeemable for discounts in their stores. Fungibility with retail goods is useful for customers, who are finally rewarded for their brand loyalty, but also for stores, who gain both loyalty and business.
It doesn’t take much for value to escape any cryptocurrency. However, with intelligent development that rewards all participants equally, blockchain projects can defend against speculative outflows by offering the same kind of incentives to lock in value instead. The currents of this young market are still wild, but they’re also cutting through bedrock and becoming more predictable. The latest generation of cryptocurrency businesses demonstrate this impressively, and the world waits with bated breath for them to mature, and perhaps one day unseat the King.