Bitcoin is not only the oldest and thus the first cryptocurrency ever, but it also fulfills the unofficial function of a reserve currency for the crypto market. In principle, cryptocurrencies and tokens can develop independently of Bitcoin in terms of price, but they do so comparatively rarely and only in phases.
In the last eight weeks, BTC has experienced a brilliant rally and at the same time some of the most heavily capitalized Altcoins have been able to keep up and their price has risen. Nevertheless, there is an interaction between BTC and altcoins. In this article, we will look at this phenomenon and examine in more detail what effects can be observed in practice.
The US dollar dominates the market
Although Bitcoin is referred to as a reserve currency, what really matters is how BTC performs against the US dollar. Thus, the market traded in US dollars is the most relevant and other currency pairs formed with fiat play a minor role internationally.
If BTC rises and increases against the US dollar, this often has the effect that the value of the altcoins decreases against Bitcoin. The effect can be explained relatively quickly. To keep up with BTC, they would have to increase in value by the same percentage as Bitcoin. Often, however, their performance is weaker and they do not manage to deliver the same performance.
This has the well-known effect that a portfolio of Altcoins is gaining in US dollars when Bitcoin starts rallying. However, if you convert it against BTC, it is often losing in value. The effect is described with the phrase "Up in USD, down in BTC".
Hodlers pay opportunity costs
If such an effect occurs in the market, then the same portfolio would have been worth more if it had been invested exclusively in BTC before the rally began. However, this does not mean that altcoins are not able to create interesting opportunities detached from BTC. The only thing that matters is the timing.
Ultimately, it doesn't matter to a trader how the performance of other assets is doing. An altcoin can produce gains in US dollars that can still promise an excellent performance. Thus, the effect explained is more relevant for hodlers, because they are agnostic about all the ups and downs of the market, but not immune to the outcome.
By the way, in 2020, altcoins were most likely to blossom when Bitcoin reached a phase where the price was moving sideways. However, these time windows were comparatively narrow and not of long duration.