As you dive into crypto, you realize the vast scope of coins and their wildly different functions. However, you also realize that all these unique coins follow Bitcoin’s price, which will make you wonder: why does the crypto market follow Bitcoin?
The crypto market follows Bitcoin because Bitcoin has the largest market cap, it is the fundamental technology of other cryptocurrencies, exchanges use Bitcoin as a reserve currency, investors want a diversified portfolio, and Bitcoin is the most recognizable crypto.
Crypto is a confusing and unforgiving place for beginners, so you may not understand all the above reasons why the crypto market follows Bitcoin. No worries; stick around, and I’ll delve into each of the above points with more detail and supporting evidence.
6 Reasons Why the Crypto Market Follows Bitcoin’s Price
There are six main reasons why Bitcoin is the main force driving the price of the crypto market:
- Bitcoin has the largest market cap.
- Most Alt-Coins are Built on Bitcoin.
- Bitcoin Has Brand Recognition.
- Exchanges Use Bitcoin as a Reserve Currency.
- The Inclination To Diversify Your Portfolio.
- Most Markets Move Together.
Don’t worry if that sounds like a lot of reasons why the crypto market follows Bitcoin. Although you may be thinking it’s easier to just start a vending machine business, I urge you to stick with me. I’ll go through each of the above points to make clear why Bitcoin drives the price of the crypto market clearly.
1. Bitcoin Has the Largest Market Cap
The crypto market follows Bitcoin because Bitcoin is the largest coin in the crypto market. The crypto market as a whole is worth about $1.26 trillion. However, Bitcoin takes nearly half the crypto market with a market cap of about $565 million.
Top Crypto Currencies Market Caps
Here is a chart showing the market cap of the top ten cryptocurrencies:
|Coin Name||Coin Market Cap|
|USD Coin||$51 Billion|
|Binance USD||$18 Billion|
Keep in mind that the market cap of cryptocurrencies fluctuates quickly, so you may see different results when you look up the same stats. The two largest coins–Bitcoin and Ethereum–are far ahead of the rest, so those will likely be the same.
As you can see, Bitcoin is leagues ahead of the competing cryptocurrencies. However, Ethereum is gaining ground on Bitcoin’s market cap. You can see Ethereum’s gain on Bitcoin through the history of the Bitcoin vs. Ethereum market cap:
On January 1st, 2020, Ethereum had a market cap of about $14.25 Billion. On the same day, Bitcoin had a market cap of about $130.5 Billion. Ethereum had about 11% of the market cap of Bitcoin.
Moving forward to now, in the second quarter of 2022, the Ethereum market cap percentage compared to Bitcoin is a different story. Today Ethereum has about 43% of the market cap of Bitcoin.
If the trend of Ethereum taking some of Bitcoin’s monstrous market cap continues, we may see the crypto market decoupling from the price of Bitcoin.
2. Most Alt Coins Are Built on Bitcoin
Bitcoin is the fundamental technology behind most other cryptocurrencies. All cryptocurrencies are built on the idea of a blockchain, which was first introduced with Bitcoin in October 2008.
Since the advent of blockchain technology, multiple crypto projects have built programs on top of Bitcoin’s original idea of a blockchain and some have even made a new technology altogether. However, even the most ambitious crypto projects are building off the fundamentals laid out by Bitcoin at the core level.
Projects building on the back of Bitcoin means their value is intrinsically related to Bitcoin’s. The intrinsic connection to Bitcoin is clearer when you’re dealing with a Bitcoin clone, which is the case with many smaller cryptocurrencies.
Think of Bitcoin as a proof of concept for all other cryptocurrency blockchains. As the public loses faith in Bitcoin, they are also losing faith in the concept of blockchains as a whole.
The same concept works in the other direction with Bitcoin rising in price. When Bitcoin booms, people have faith in the benefits of blockchain technology. Therefore, since other cryptocurrencies are built on the same blockchain technology, they will rise in value as Bitcoin rises in value.
Benefits of Blockchain Technology
I’ve spoken a lot about how blockchains affect the price of Bitcoin, but I haven’t spoken about why blockchains have any value. I’ll attempt to explain the reasons behind blockchain value in this section of the article.
Here are five benefits of blockchain technology:
- Security: The decentralized nature of blockchain technology makes blockchains far more secure than any other database security technology. To attack a blockchain, you need to develop enough computing power to take over 51% of the blockchain’s computing power.
- Transparency: Transparency is another huge blockchain benefit. Blockchains publish every transaction that has ever happened on a public ledger. Having every transaction published publicly is a level of transparency that no bank has offered or will ever offer.
- Automation: Blockchains allow for automation at scale. Tasks that would have taken hundreds of hours of human work can be done automatically on the blockchain for a small transaction fee with smart contracts.
- Traceability: A common criticism of crypto is that it is ideal for criminal enterprises, but that couldn’t be further from the truth. In reality, blockchains record a paper trail of transactions carried out with cryptocurrencies, making tracking illegal activity easier for law enforcement.
- Versatility: Blockchains are currently known for cryptocurrencies. However, blockchains have the potential to revolutionize more industries than finance. For example, blockchains could be used to secure sensitive information in industries like healthcare.
I’ve only scratched the surface of the important benefits of blockchains. There are still dozens of benefits of blockchains waiting to be discovered by you!
3. Bitcoin Has Brand Recognition
No matter where you go, anyone who has ever heard of blockchain or cryptocurrencies will have heard of Bitcoin. The same cannot be said for other cryptocurrencies–not even for the second-largest, Ethereum.
For many, Bitcoin is synonymous with cryptocurrencies. If you ask someone about smaller coins like Chainlink, DogeCoin, or Ethereum, you’ll probably get a confused look. The recognizability factor that you have with Bitcoin is a massive driving factor for the crypto market following Bitcoin.
4. Exchanges Use Bitcoin as a Reserve Currency
Exchanges use Bitcoin as a reserve currency the same way banks hold USD as a reserve currency. The amount of Bitcoin exchanges hold indicates the health of the crypto market. As exchanges sell more Bitcoin, it shows that the market will go up because the public is purchasing more Bitcoin from exchanges than they’re selling.
The public perception of the number of Bitcoin exchanges holds drives the price of the crypto market as a whole. Therefore, when investors see exchanges selling Bitcoin, they will purchase alt-coins to time the market.
Investors buying alt-coins as exchanges sell Bitcoin reinforces the coupling of alt-coins and Bitcoin’s price.
Trading Bots Are Amplifying the Market Following Bitcoin
Trading bots put fuel on the fire of the price coupling from exchanges using Bitcoin as a reserve currency.
Programmers have developed bots that can identify the pattern laid out above. When Bitcoin is sold from exchanges, bots will automatically purchase alt-coins because there is an almost guaranteed chance the alt-coin market will grow along with Bitcoin.
Bots automatically purchase alt-coins when Bitcoin rises in value, which fuels the cycle of alt-coins following Bitcoin’s price.
5. The Inclination To Diversify Your Portfolio
Most investors know that having a diversified portfolio is a top tool to ensure proper risk management. Investors carry over this risk-management strategy to the crypto universe.
As investors carry over their risk-management strategy, they purchase Bitcoin and a handful of alt-coins together. Additionally, investors will sell Bitcoin and all their alt-coins together when they want to leave the crypto market.
Investors’ portfolio diversification techniques lead to alt-coin prices fluctuating along with Bitcoin.
However, there is an argument against portfolio diversification in the crypto world. Some crypto investors recommend buying Bitcoin or Ethereum because they are the only long-term-established cryptocurrencies.
As you get deeper into crypto alt-coins, there is more potential for profit and also more potential for massive losses. Therefore, some investors recommend you stick to the top cryptocurrencies and use crypto to diversify your total investment portfolio instead of diversifying your crypto portfolio.
6. Most Markets Move Together
Crypto may seem unique because the price follows Bitcoin so closely. However, most other markets interact the same as crypto.
A great example is the housing market. As the housing market gains steam, housing prices everywhere go up. Conversely, as the housing market crashes, housing prices everywhere go down.
You likely won’t see housing prices in New York City going up while prices are simultaneously falling in Boston, Massachusetts. Similarly, you likely won’t see Bitcoin prices going up while Ethereum prices are down.
Real estate isn’t the only market that follows the same trend as Bitcoin. You can see the same correlation between stocks and bonds. Stocks move together, and bonds as a whole move together.
Additionally, stocks and bonds tend to follow each other. If the price of bonds crashes, stocks are likely to follow suit.
It’s easy to look at the crypto market following Bitcoin and think it’s out of the ordinary. Still, most markets rise and fall, similar to the crypto market.
Do All Cryptocurrencies Follow the Price of Bitcoin?
Not all cryptocurrencies follow the price of Bitcoin. There are stable coins that don’t fluctuate in price and therefore do not follow Bitcoin. Additionally, new small crypto projects do not follow the price of Bitcoin.
Which Crypto Does Not Follow Bitcoin
The most common example of cryptocurrencies that don’t follow Bitcoin is stable coins like USD Coin. Stable coins do not fluctuate in price at all. Instead, they are pinned to a certain price. In the case of the USD Coin, the currency is permanently pinned to the price of $1 USD.
Investors use stable coins to enjoy some of the benefits of crypto, like blockchain security, passive income opportunities like high-yield staking, and sending money across borders with low fees. While investors enjoy these crypto benefits, they don’t have to worry about the value of their crypto fluctuating along with the volatile crypto market.
Here are five more stable coin examples:
- DAI: DAI is a similar stable coin to USD Coin. DAI is a stable coin pegged to the price of the US Dollar.
- Augmint: Augmint is a stable coin pegged to the price of one Euro.
- Wrapped Bitcoin (WBTC): This coin is not pegged to a fiat currency like DAI and Augmint. Instead, WBTC is pegged to Bitcoin. WBTC is used to participate in decentralized apps on the Ethereum blockchain while taking on the volatility of Bitcoin instead of Ethereum.
The other common time cryptocurrencies that do not follow the price of Bitcoin are smaller alt-coins. Small alt-coin prices can be easily manipulated with small amounts of money, which means they are usually far more volatile than Bitcoin.
The higher volatility of Bitcoin means these tiny coins tend to skyrocket and crash without any concern with the price of Bitcoin. The frequency of price hikes and crashes makes smaller alt-coins a breeding ground for day traders attempting to time coins to make massive returns over a short period.
There are too many reasons to pinpoint why the crypto market follows Bitcoin. There’s no denying Bitcoin is a behemoth in the crypto market, and it will probably stay at the top for a very long time.
However, some serious competitors are gunning for Bitcoin’s number one market cap position. Ethereum is catching up to Bitcoin slowly but surely, and it could be the coin to break the crypto market from following Bitcoin.
If you haven’t gotten your fill of crypto talk, check out the #1 easiest way to make passive crypto income for free.