By and large, it is not unreasonable to expect the entirety of the crypto market to follow the lead of its flagship cryptocurrency, Bitcoin. This is generally true when things start going downhill. However, it gets trickier when Bitcoin shoots through the roof. It is not in the least set in stone that the rest of the pack will follow as fast. Sometimes, Bitcoin pumps cause altcoins dumps, for no apparent reason.
Let’s dive below the surface of this seemingly strange pattern and try to better understand what is actually going on down there.
Trends Are Your Friends
If someone not familiar with the cryptocurrency market looked at the price dynamic of Bitcoin, on the one hand, and altcoins, on the other, but only in the short term, he could easily arrive at the erroneous conclusion that the top cryptocurrency and altcoins are not correlated at all. Moreover, he could even dare to suggest that they can be used as a hedge against the price volatility of each other.
Indeed, this is not how the entire market behaves in the long term. Bitcoin is still the primary driver of the crypto space. This can be easily seen by the comparison of Bitcoin with the second largest cryptocurrency Ether, which can be loosely considered a deputy for the altcoin faction:
It may seem like BTC has been an underdog here, but don’t fall for that false impression. It is Bitcoin that is pushing the price of Ether higher, and not the other way around. Market participants are well aware of who is the boss in the pit. And it is their effort to maximize profits that explains why we often see Bitcoin rising while altcoins going down in the short term.
Factors at Play
The key to figuring out this somewhat counterintuitive dynamic lies in understanding two factors. First off, institutional investors are primarily interested in Bitcoin, and they don’t particularly care about altcoins. By extension, it is the shekels from their pockets that are fueling Bitcoin rallies. Then, the retail investors have only so much money, and that money is already invested in both Bitcoin and altcoins.
Given these two factors playing out at the same time, it is not exactly rocket science to be able to see that once institutional investors start buying up Bitcoin, simple traders notice the increase in BTC value and try to steal a slice of the pie. But the only way they can get dough to invest in Bitcoin is by disinvesting in altcoins.
Now, the traders are starting to sell their altcoin portfolios for Bitcoin in order to get in on the rise of the top cryptocurrency. For that reason, the buying pressure in BTC increases further while altcoin prices all of a sudden go down.
When the Bitcoin rally finally runs out of steam, people begin buying cheap altcoins again with their expensive bitcoins. Since the Bitcoin pump is fueled by institutional money, simple folks selling BTC can’t change its price to any meaningful degree. However, their impact is sufficient to drive the altcoin market up. It looks like Bitcoin stagnates while altcoins pump.
Then rinse, repeat.
Until it stabs you in the back.
It is important to keep in mind that this opportunity to make a quick buck is rather short-lived. As demonstrated above, the altcoin market closely follows Bitcoin on longer timeframes. Bitcoin pumps are quickly followed by altcoin pumps, and oftentimes, with a vengeance. Put simply, you may learn about the altcoin sell-off only after it’s already over.
Before the altcoin frenzy of 2017, Bitcoin had been totally dominating the crypto market. This is no longer the case. Today, Bitcoin dominance is below 50% in terms of market capitalization (it’s not a very useful metric but still):
Of course, it doesn’t mean that Bitcoin ceased to play the leading role in the cryptocurrency arena. This is not the case, either. However, it does in fact mean that altcoin dumps during Bitcoin pumps are shorter and fewer. It just can’t be any other way under the present circumstances. These dumps are more like flash crashes nowadays, anyway.
In a nutshell, the only way you could meaningfully exploit this pump-and-dump situation is by placing orders to buy beforehand at where you expect the price of a certain altcoin to hit the bottom. And that turns you into a legit target for predators bigger than yourself.
The sad truth is the only thing institutional investors care for is their bottom line. They don’t give a damn about Bitcoin’s ideals and values. They will start selling Bitcoin faster than they will buy it – if that helps the bottom line. But if Bitcoin goes south, altcoins universally follow. Basically, it means that instead of quick profits you will be counting fast losses.
Long story short, don’t get caught in the crosshairs.