Altcoin Prices Are Tied To Bitcoin Prices, Not The US$, And That’s Weird

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On Reddit user FlexNastyBIG pointed out a strange market dynamic when it comes to altcoin prices:

For the sake of exercise, let’s suppose that 1 BTC = $1000 and 1 ALT = .5 BTC (giving it a USD value of $500).

If the price of BTC increases to $2000, I would expect the value of ALT to drop to .25, so as to maintain a constant USD value of $500.

I don’t often see that happen. When the value of BTC increases against USD, the ALT value typically also increases against BTC.

If the market cap of bitcoin doubles in US$s that typically also means that the market cap of altcoins also doubles in US$s. This is unusual because the coins should be mostly uncorrelated – the market cap of bitcoin shouldn’t affect the market cap of an altcoin like Signatum.

Potential explanations include:

  • The altcoins are traded in bitcoins not US$s, and so aren’t pegged to the US$. While it’s true that altcoins are traded in bitcoins, the US$ remains the world’s reserve currency, and you’d expect traders to be pricing it according to the US$ price not the bitcoin price.
  • An increase in the market cap of bitcoins is a positive sign for the future of cryptocurrencies in general, and so warrant a rising market cap for all currencies. This explanation is plausible though you could also argue that a rise in Bitcoin’s market cap makes it less likely that other currencies will ever dethrone it, and this should cause them to fall
  • This is a speculative market and the standard rules of economics don’t apply. Sure, but, this explanation essentially says “it’s magic”.

It’s a Strange New World…

 

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