To effectively interact with the broader crypto market, one must first understand Bitcoin, and in particular, the latest BTC price analysis. There is a critical reason why.
The list of investment options in the blockchain space has kept on growing over time. It all started with bitcoin, and the single category of cryptocurrencies. Bitcoin was followed by similar (not necessarily the same) crypto assets like Etheruem (ETH), Litecoin (LTC), and Ripple (XRP). Today, there are close to three thousand cryptocurrencies in existence.
We’ve also seen additional categories come into the picture. For example, we now have the token type, which includes digital assets sold through initial coin offerings (ICO) and the security token offerings (STO). The ICO and STO tokens are vehicles that startups have used to raise capital in an arrangement modeled on the initial public offering (IPO) in the stock market.
Another class of crypto assets we have today is the stablecoin category. These are crypto-assets pegged on the real-world assets and currencies like gold and fiat money. Examples in this category include Tether (USDT), USD coin (USDC), and Binance USD (BUSD).
Last but not least, we now have Decentralized Finance (DeFi) applications, blockchain platforms that provide the tools to trade crypto assets in a way that is similar to what happens in the traditional financial markets but without the central authorities.
The Bitcoin price is a common denominator
All of these are opportunities that the blockchain has created for investors to grow their value. You could use one of them, or, the ideal situation, try each of the categories as a way of diversifying your investment.
What has, however, remained a constant so far for all these class of assets is the influence the Bitcoin price has over them. Except for the stablecoins, all the other crypto assets have a high positive correlation with Bitcoin.
That means the prices of these other assets still mirror that of Bitcoin. When the price of Bitcoin goes up, they almost always go up as well. When the Bitcoin price climbs down, they do the same.
Below is a chart covering the movement of the Bitcoin price in a year. The green line in the chart tracks the dollar value of the price:
Here is the chart of the Ethereum (ETH) price in the same period. The green line tracks its US dollar value:
Also, look at the price chart of Ripple (XRP) in the same period:
All three charts are from CoinMarketCap.com.
The general direction of movement is the same in all three charts.
However, it is essential to point out that the similarity in price movement of the other crypto assets (and indeed the rest) with that of Bitcoin is more evident when you look at more extended periods, for example, a month, a year, or more.
Movements within the day or even the week might seem to be very different. That means your day trading strategies don’t have to rely on Bitcoin as a source of critical information.
However, when putting in place a long-term strategy, for example, HODLing Ethereum for months or years, understanding the Bitcoin price’s potential price movement might be of immense help to you.
But why is that so?
While it is clear that the prices of most crypto assets mirror that of Bitcoin, it is a little challenging to figure out why. There is hardly any direct technical relationship between Bitcoin and the majority of these other assets.
The most likely cause of the high positive correlation is the market perception of the players (traders and HODLers of the assets).
The fact that Bitcoin was the first to come into the picture significantly adds to the perception that if it is losing value, then the others must lose value and vice versa. In fact, in many discussions, especially those that involve beginners, the word ‘Bitcoin’ is often loosely used to refer to all crypto assets.
Indeed, given that trading is powered by perceptions and emotions, how people see and feel about Bitcoin is often transferred to these other assets.
For example, the Bitcoin mining reward halves every four years, and that has often pushed the price up just before and after it happens. Fortunately, the halving of the mining reward is a predictable event. Even if you are holding Litecoin, when it happens to Bitcoin, you could still expect your value to go up, because it has almost always been the case.
For the foreseeable future, the price of Bitcoin will remain a critical cue of the direction the price of the other assets in the market might take. That makes it important that you learn how the Bitcoin price moves and also follow it closely. In particular, it is important to consider the factors that could influence change in its price.