The Reason Why Coins Rise and Fall in Tandem With Bitcoin
Many coins have much going for them, yet once the mighty overbought Bitcoin tanks it pulls down everything with it.
Why is that so?
Why don’t coins like LTC and XRP decouple from BTC?
The answer is simple:
The trading is still dominated by exchanges that do not offer fiat pairs, but trade exclusively relative to BTC (which makes BTC a de facto currency).
Bound by default to the moves of BTC (and increasingly ETH), altcoins have a marked tendency to rise and fall in tandem with these to dominant coins.
Put differently:
Bitcoin and Ethereum are the mediums of exchange. When it goes down in value relative to other coins, then people are unable to spend as much of it to get new coins.
People also often have to buy Bitcoin in order to get out of those exchanges in a bear market, because it is impossible to switch from from coins to fiat, and instead people have to buy Bitcoin, and then send their Bitcoin to another exchange to sell it for fiat.
If we look at coins paired to BTC or ETH they look almost flat, when in fact paired to USD or EUR they might be crashing.
Most telling proof are the recent two flash crashes mid-June, 2017. See how the indices move hand in hand? BTC tears them down, yet Litecoin was able to build own legs:
Now this is near perfect correlation between BTC and XRP during the flash crashes mid-June, 2017.
Litecoin was torn down by the same BTC-induced correlation, yet able to run on its own legs again…
Conclusion:
For the time being Bitcoin keeps other coins enslaved. Yet BTC dominance is waning.
In the longer run it will make no sense to stick to BTC/coin pairs.
The price in Bitcoin is irrelevant. A sharp drop in, say, XRP/BTC doesn’t necessarily mean a devaluation.
This BTC corset will become a ghost of the past as mainstream is embracing cryptocurrencies and demanding to purchase coins directly with cash — or any other coin for that.
For now, however, most coins remain dependent on the Bitcoin parade.