Why Do Bitcoin and Altcoin Prices Often Correlate?

Speculating and writing about the “Bitcoin bubble” has become a contact sport for some sceptical journalists, bloggers and financial analysts.

Bitcoin has been compared to every other financial bubble since speculating on investments started in the Netherlands, during the Dutch Golden Age of the 1630’s.

Back then, Tulip bulbs first brought to Holland from Turkey in the 1590’s, started to become incredibly valuable. Bulb prices became utterly disconnected from fiat currency valuations at the time until at the peak, you could exchange a large townhouse in a desirable area of Amsterdam for the price of one rare bulb. And then the bubble burst in 1637, wiping out fortunes and reducing the price of Tulip bulbs to the monetary value of one onion, making them once again, almost worthless.

Speculation and Fluctuations

Economist Nouriel Roubini (former senior adviser to U.S. Treasury Secretary, Timothy Geithner) has recently said that Bitcoin represents the “mother of all bubbles, the biggest bubble in human history”, describing it as “much worse” than Tulipmania. A leading member of the Governing Board of the Austrian National Bank, Kurt Pribil has recently slammed cryptocurrencies as “pure speculative objects.” Billionaire U.S. investor, Warren Buffett and the CEO of JP Morgan have both dismissed Bitcoin and cryptocurrencies as speculative and too risky.

However, a growing number of economists, investors and hedge fund managers disagree.

Bitcoin and various Altcoins are receiving constant mainstream media coverage — a sign that the mainstream media is taking this seriously because more than a few investors are doing the same. Daily media coverage is an important sign that cryptocurrencies are here to stay. There is also a growing indication that governments and financial regulators won’t allow the market to remain unregulated forever — which is, in many respects, not a bad move.

Some regulatory oversight would protect the industry, protect investors and increase the inherent value of cryptocurrencies. Any oversight is still in the early days, with France and German finance ministers planning to discuss this at the next G20 meeting in March 2018.

Perhaps, in time, some regulation might reduce the chance of massive, prolonged rallies ending in volatile and brutal crashes, as happened earlier in February when the price fell below the psychologically important level of $6,000. Bitcoin and other currencies have since rallied and is fast approaching the $10,000 price point. These rallies and reverses seem to indicate an underlying correlation between Bitcoin, the market-leading cryptocurrency and the price of Altcoins.

Is there a correlation between Bitcoin and Altcoin prices/valuations?

For example, let’s take a look at what the currencies were doing in May 2017.

On 27 May 2017, Bitcoin fell 20 percent — from $2,500 to $1,900.

Compared to the top 20 alternative cryptocurrencies, including Ethereum, Ripple and Litecoin, it had a relatively good day. In comparison, they all fell nearly 50 percent. Over a seven day period, Ripple lost half of its market cap, from $17 billion to $6.2 billion, sparking concern in Japan and South Korea, where there are a lot of Ripple investors.

Is it simply the case that Bitcoin leads and other coins follow?

Yes and no.

Bitcoin leads — both the dips and the spikes — but investors don’t invest in Altcoins all the way to the top of a spike or all the way down into a dip. Why? Because when price surges indicate Bitcoin has further to rise, investors pile onto Bitcoin and out of an Altcoin. The same happens when rallies turn into dips.

Speculative trading is driving a lot of these trends. Altcoins do fluctuate in correlation to the price of Bitcoin, just without the excessive highs and lows, which is one reason Ethereum was the most sensible platform for those wanting to invest in crypto-startups, through ICOs.

Bitcoin still dominates the market; it is without a doubt, the most well-known cryptocurrency, traded by more institutional investors than ever before. Despite $3.5 billion raised through ICOs, thanks to smart contracts, Bitcoin is, for the foreseeable future going to have an impact on the price of every other cryptocurrency.

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