Altcoins closely follow the Bitcoin price as uncertainty covers the crypto markets

Historical data shows that in times of extreme market turmoil, most altcoins tend to closely track the price movement of Bitcoin.

Cryptocurrency investors have faced numerous challenges over the past month or so, largely due to the unprecedented drop in prices associated with most of the major digital currencies in the market.

Since the beginning of June, total market capitalization has dropped from over $ 1.8 trillion to about $ 1.3 trillion, a loss of more than 40%.

What is interesting is that Bitcoin continues to correlate strongly with Ether and the broader altcoin market, while the market is bearish and shows signs of contraction. To explain this point in more detail, it can be seen that the correlation of Bitcoin with Ether has been held near the 0.8 mark for the past 30 days.

Correlation between Bitcoin and Ether | Source: CoinMetrics

A value between 0 and 0.3 indicates little or no correlation between Bitcoin and Ether, while a value between 0.3 and 0.5 indicates a low correlation. If the index fluctuates between 0.5 and 0.7, it indicates a moderate correlation, and a level above 0.8 indicates an extremely high correlation.

What does it all mean?

Leo Cheng, co-founder of the decentralized lending protocol CREAM Finance, says that although Bitcoin has always been considered the strongest and most secure store of value in the world since April, ether and a number of other altcoins add to the value of King Coin. have attacked:

“As part of this withdrawal, it’s not surprising that money is flowing back into Bitcoin. Altcoins have been highly correlated in the past and follow ethers. What has surprised many over the past few months has been how the coin meme outperformed the DeFi token based on the history of “efficient assets”.

Cheng further noted that in addition to price volatility, various acceptance metrics related to the crypto market (such as total users, network activity) have continued to hit all-time highs.

“Engineers in the crypto space built. Pullbacks have the effect of reducing noise and giving engineers room for innovation. “

Similarly, CEO Antoni Trenchev of digital asset platform Nexo said that the recent incident of China’s persistent love-hate relationship with crypto, which has pushed Bitcoin prices down, has set a bad example for the rest of the market:

“When news like this comes out and Bitcoin reacts, it often has dire consequences for the broader crypto asset space. Also, only a handful of altcoins will follow Bitcoin as it will continue to skyrocket in 2020, with mainly DeFi projects growing exponentially during DeFi summer.

Finally, Trenchev suggested that if inflation continues to rise after the record month (May), he expects cryptocurrencies to outperform all other asset classes this year, “which could lead to a decline in the bitcoin-altcoin correlation such as peak of the market at the beginning of this year. “

Bitcoin is still a leader in the cryptocurrency market

It cannot be denied that whenever the value of Bitcoin rises sharply, the overall market will follow. This is because sentiment often extends to other altcoins when investors have an optimistic view of Bitcoin.

However, the cryptocurrency market has been shown to behave beyond the imagination, with things like FUD and short-term volatility playing an important role in determining dynamics.

Winston, operator of the automated profit farming protocol Harvest Finance, likes to see things from a different perspective, claiming that most major altcoins have declined since Bitcoin dominance hit rock bottom on May 18:

“Most will move in parallel, although there will always be some exceptions. With this looming uncertainty, many are seeking refuge in stablecoins and stablecoin farms to hedge against current volatility. “

In this regard, Blake Ho, CEO of DeFi platform Furucombo, believes that during such times of volatility, it is best for investors to slow down and look at assets other than Bitcoin, Ether, etc. in order to diversify their investment portfolio.

“Allocating some capital to stablecoins for interest-based loans or long-term investments in promising projects can help reduce overall risk.”

How long is the correlation between Bitcoin and Altcoin?

In the first quarter of 2020, several known altcoins were extremely correlated with Bitcoin and exceeded 0.91). This essentially shows that whenever Bitcoin goes up or down, these tokens follow the same path. Overall, this trend continued throughout the year, but things started to change in early 2021.

In January and February of this year, for example, this correlation decreased. When it passed the 0.8 mark again, several Altcoins exploded in value. It’s interesting to note that ether, along with many other top altcoins, tends to offer higher returns when compared to bitcoin on bull runs. This was particularly evident during the bull market earlier this year, when Ether saw gains of nearly 600% versus around 150% for Bitcoin.

Therefore, the market development will be particularly interesting from this point on, especially if Bitcoin can continue another bull run. And while the altcoin market is sure to see a spike if Bitcoin rises, the question is whether some of the big altcoins will pull away from King Coin – just as Ether did when it hit an all-time high of $ 4,200 – and create their own financial identity in the coming months.

Teacher

According to Cointelegraph

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