Since the beginning of cryptocurrencies, Bitcoin has been a pioneer and trailblazer, setting standards and dictating market trends. When Bitcoin was created in 2009, it was the only cryptocurrency. Over time, with the emergence of altcoins, they began to be seen by many as complements or even alternatives to Bitcoin.
Liquidity and trading volumes: Why altcoins depend on bitcoin
Liquidity is the ability of an asset to be sold or bought quickly without a significant change in its price. In the context of cryptocurrencies, high liquidity usually means that a large number of trades can be executed without large fluctuations in price.
Why is liquidity important?
Price stability: Cryptocurrencies with high liquidity are less prone to sudden price fluctuations, as large buy or sell orders are unlikely to cause dramatic price swings.
Investor Attractiveness: Many large investors and trading platforms prefer to work with assets that have high liquidity, as this reduces risk and provides the ability to enter and exit positions quickly.
From its inception until today, Bitcoin has maintained its position as the cryptocurrency with the highest liquidity. This makes it the main “currency of exchange” in the world of cryptocurrencies, through which new entrants often buy altcoins.
When new investors enter the crypto space, they typically start by buying bitcoin because of its recognisability, reliability, and availability on major exchanges. They can then exchange bitcoin for altcoins, which increases the trading volume and liquidity of those altcoins.
Example: In 2017, when interest in cryptocurrencies skyrocketed, many newcomers entered the market, starting by buying bitcoin. Once they familiarised themselves with the market, many of them decided to invest in altcoins in search of high returns. This led to the fact that when bitcoin rose, altcoins also showed strong growth, reflecting the dependence of their prices on bitcoin's performance.
Liquidity and trading volumes play a key role in altcoins' dependence on bitcoin. Due to bitcoin's high liquidity, many altcoins remain closely linked to its price performance, especially during periods of high volatility or significant influx of new entrants into the market.
Psychological addiction to bitcoin
Psychological dependence in the context of finance and investing refers to how investors' perceptions, moods, and behaviours may be related to or motivated by feelings, beliefs, and expectations rather than purely rational analysis.
Bitcoin as the “Gold Standard” of Cryptocurrencies:
Primacy: Bitcoin was the first cryptocurrency and thus established the initial impression and brand recognition. For many people, Bitcoin has become synonymous with the word “cryptocurrency”.
Media attention: Most news and articles about cryptocurrency often focus on bitcoin. This makes it the most visible indicator of the state of the entire market in the eyes of the public.
Psychological Aspects of Addiction:
Crowd Effect: When bitcoin rises or falls, it creates a reaction among investors and traders. If bitcoin falls, panic can spread, leading to selling in other cryptocurrencies as well. If bitcoin rises, optimism can infect the market, encouraging buying across the altcoin spectrum.
Self-reinforcement: Psychology-based behaviour can reinforce itself. If investors see altcoins following the movement of bitcoin, they may expect this to continue in the future and thus base their decisions on this assumption, reinforcing the pattern.
Risk and uncertainty: Cryptocurrencies in general are a relatively new and volatile asset. In the face of uncertainty, people often look for “anchors” or benchmarks to help them make decisions. Bitcoin, as the most recognisable and established cryptocurrency, regularly serves as such an anchor.
The psychological dependence of altcoins on bitcoin is not only real, but also plays an important role in market dynamics. As long as bitcoin remains at the centre of media, public and investor attention, this dependence is likely to continue. However, as the crypto market develops and matures, this psychological connection may weaken, especially if other cryptocurrencies begin to play a more dominant role or offer unique opportunities and applications.
Future dependence of altcoins on bitcoin: Forecast and Prospects
While the historical dependence of altcoins on bitcoin has been clear, the future may bring very different trends. Let's take a look at possible scenarios and factors that could influence these dynamics.
Technology development and innovation: Many altcoins have been created to solve specific problems or provide unique features that bitcoin does not have. If these technologies or innovations become widely recognised and become the basis for real-world applications, it may reduce their reliance on bitcoin.
Example: If the Ethereum network is widely used for decentralised applications, its value may become more independent of bitcoin.
Global regulation: Individual countries or international bodies may begin to regulate cryptocurrencies in different ways. If regulation becomes stricter for bitcoin but less restrictive for certain altcoins, this could change the dynamics of dependency.
Example: If bitcoin becomes highly regulated due to privacy concerns, altcoins with improved privacy features may benefit.
Mass adoption: If altcoins are adopted on a broader level, such as by corporations, states or large organisations, it could reduce their reliance on bitcoin.
Example: If a particular altcoin becomes the standard for decentralised financial transactions or smart contracts at the state level, its value and liquidity could become more resilient to bitcoin fluctuations.
Market Diversity and Specialisation: As the crypto market grows and matures, altcoins may begin to specialise in certain niches or areas, making them less susceptible to general market trends and therefore less dependent on bitcoin.
Example: An altcoin specialising in fast microtransactions for the gaming industry may be less sensitive to bitcoin movements than the commonly used altcoin.
While bitcoin continues to play a dominant role in the crypto market, the future of altcoins' dependence on it remains a matter of debate. A variety of factors, from technological innovation to global regulation, could influence this dependence. While some believe that bitcoin will remain the “gold standard” of the crypto industry, others believe in the increasing diversity and specialisation of the market.
