The consequence of Bitcoin’s recent halving is clear. If demand for Bitcoin is exactly the same, then Bitcoin miners won’t be able to sell enough Bitcoin to satisfy demand, resulting in the cryptocurrency becoming perceived as being more scarce and hence more valuable ... the basic economics of supply and demand.

Still, many crypto investors are interested in investing in “altcoins”. Altcoins are cryptocurrencies other than Bitcoin. A few examples are Ethereum (ETH), BNB Chain (BNB) and Ripple (XRP).

So why are investors looking at altcoins post-Bitcoin halving? Well, in part it’s due to them being able to potentially outperform a Bitcoin-only crypto portfolio. Conventional wisdom says that altcoins typically follow the footsteps of Bitcoin in terms of price performance.

The oversimplified way of putting it is, if Bitcoin goes up, altcoins go up, and vice versa.

Rule of thumb

This rule of thumb naturally arises by observing two major crypto boom cycles in the span of less than a decade. Easy Crypto’s data analyst studied the daily price movements of Bitcoin (ie how much Bitcoin price increased) and compared that with the daily price movements of coins that are older than 2018, whose market cap is currently in the top 10 ranks. This gives us a good enough length of history for higher quality data.

Notice how prices of altcoins tend to cluster around a range (above right). When Bitcoin’s price dropped 10 per cent, most altcoins dropped 20 per cent. There’s an almost linear price correlation as Bitcoin’s price increases approach 10 per cent.

But when Bitcoin’s price increases beyond 15 per cent, there’s a whole range of possible prices for altcoins, from shooting up more than 100 per cent to getting as low as 50 per cent. On the opposite end of the spectrum, when Bitcoin loses more than 15 per cent of its previous day’s value, there is also a wider range of possibilities altcoins can be priced at.

On average, price movements for altcoins tend to be lacklustre when Bitcoin’s price increases by more than 30 per cent, a surprising counter-trend for sure. Bitcoin rarely moves beyond 30 per cent in a single day. When it did, it was due to a special condition, such as Bitcoin ETF issuers buying up Bitcoin and inducing a “supply shock”. When Bitcoin received so much attention, investors seemed to care more about Bitcoin than altcoins.

So, yes, while conventional wisdom is correct to say that altcoins often follow the path of Bitcoin in terms of price trends, there are important nuances you should know about, so you don’t follow the pattern blindly.

The bottom line is: altcoins are priced by the Bitcoin market’s confidence.

The strongest pointer to why altcoins are priced by Bitcoin’s market confidence is that when Bitcoin fell beyond 10 per cent of its previous day’s value, altcoin investors looked frantic, as selling occurred so much that altcoins could fall around 25 to 50 per cent of its previous day’s value.

Price performance

A day trader may only care about daily price movements. However, an investor should think with a longer timeframe. This means thinking less about how a crypto asset is priced and more often about how a crypto asset can solve real-world problems.

Take a look at another chart below. This chart doesn’t show the true prices of each cryptocurrency apart from Bitcoin (BTC). The altcoin prices here have been normalised, meaning that for every coin we look at, we assume that their price started out exactly the same as Bitcoin’s in November 2017. This gives us a fairer picture of how each coin performs relative to one another.

This chart should make you regret not buying Dogecoin. Although the price comparisons are accurate, this chart is misleading. It doesn’t show you the value being offered by each coin, and no-one would know how a product could be or fail to be relevant and useful until we’ve observed it long enough.

Ethereum paved the way for people to build applications that use blockchain technology without them having to build an entirely new network. BNB Chain does the same, but cheaper. Ripple is being used within the banking industry while Cardano is slowly being adapted by governments
and private businesses.

Yet, Doge appears second to BNB in leading the pack. It offers what Bitcoin offers, but much cheaper. At the moment it really doesn’t have any other use apart from it being a collectible (memecoin) and a payment method for buying a Tesla.

It’s true that valuable things tend to be more expensive as more people want them. But in the short term, the reasons people want a crypto asset can at first be unclear or simply speculative. The value being offered by an asset will eventually be the primary reason for its price in the long term.

So, should you invest in altcoins? The answer depends a lot on your own financial conditions and how knowledgeable you are about the crypto market.

Easy Crypto is not a financial adviser, so we can’t give you the answer. But once you’re confident with your research, boost your confidence even more by using a registered local crypto exchange.

Investing in crypto carries risk. Always do your own research.