The bitcoin price reached a peak of nearly $20,000 in December 2017. During that bitcoin bull run, most of the altcoins were in sync with bitcoin — the cryptocurrency market boomed. All the altcoins reached their all-time high in those days.
When the bitcoin crash occurred in January 2018 — bitcoin price fell by 65% in early 2018 — altcoins collapsed 80% from their peak price, too. That clearly showed that most cryptocurrencies are indexed to bitcoin. In simple terms, altcoins are contingent upon bitcoin’s movement. So when the price of bitcoin drops, altcoins value drops too, and vice versa when the price of bitcoin goes up.
Technically, the price movement of bitcoin determines the fate and price of altcoins. But what drives the price of bitcoin? and why does the price movement of bitcoin greatly affect altcoins?
What drives the price of bitcoin?
Bitcoin has undeniable utility even when compared to fiat currencies and other cryptocurrencies. There are thousands of merchants in the world who are accepting bitcoin as a means of payment for their services, which proves the relevance of bitcoin in the global economy.
The number one factor that drives the price of bitcoin is its supply and demand. As a fundamental cryptocurrency, bitcoin keeps gaining tremendous attention from the public. So, the demand for bitcoin increases at a fast rate. However, its supply decreases every year because of the halving events that take place every four years. In this way, when the demand is high, and supply is low, it drives up the price and the reverse is true.
The market price of bitcoin is closely related to mining energy used to produce bitcoins. Bitcoin mining is an energy-intensive process; it requires over 215 kilowatt-hours of electricity for each transaction. On top of that, the bitcoin miners are always solving a difficult cryptographic equation. Miners have to find a good cryptographic nonce that goes into a block in the shortest time possible. Solving this cryptographic problem is also expensive.
Public opinion has a great influence on the price of bitcoin. When the media predicts a bull run soon, several people buy bitcoins hoping to buy low and selling high when the bull run starts, so this pushes the price upwards because the demand is high, and when there is a negative media coverage, boatloads of people sell their bitcoins for fiat, which drives the price down.
Why does the price movement of bitcoin greatly affect altcoins?
Altcoins are the alternative cryptocurrencies, which launched after the success of bitcoin. There are thousands of altcoins in the cryptocurrency space; some of these altcoins are Ethereum, Ripple, EOS and many more.
The price of these altcoins is strongly tethered to bitcoin because bitcoin is the primary currency that is used to purchase most of the altcoins on cryptocurrency exchanges; it is the “USD” for the crypto space. All cryptocurrency exchanges have trading pairs and bitcoin is being traded the most for other altcoins in terms of volume and market cap. This gives bitcoin enough leverage to weigh down or lift altcoins.
Bitcoin is the king in the cryptocurrency market, with a market share of almost 67%, generally, it decides the price trend. When the king coin rockets, the small ones follow, too. Other than that, if bitcoin is doing well, investors easily invest in altcoins, which drives the price of altcoins to the moon. Bitcoin is the trunk for the cryptocurrency world.
The cryptocurrency market is still in its early days, it desperately needs bitcoin as a reference point for all the altcoins. However, it’s important to note that sometimes, bitcoin and altcoins have an inverse relationship, where bitcoin rises, and other coins drop in price. This happens because people are selling their altcoins to go into bitcoin. So, the demand for altcoin is low, which drives down the altcoin prices.