Bitcoin is considered the king of all cryptocurrencies as it was the first cryptocurrency to be created. Ethereum was the second. Billions of dollars flow through both currencies daily, yet Ethereum still seems to follow Bitcoin. Let’s find out why this happens
The cryptocurrency market is still considered to be very nascent. It’s a brand-new asset class, with prices fueled by speculation. As Bitcoin was the first to market, all cryptocurrencies (in this case Ethereum) currently look to bitcoin to see which direction they should be trading in. The utility does not play a role in price movement just yet.
Ethereum follows Bitcoin for the same reason that little siblings will follow their older siblings. As bitcoin was the first, it’s considered the king of all the cryptos and the firstborn. Ethereum was created six years after bitcoin and can be looked at as the younger brother or sister. It’s no wonder that Ethereum still follows its older sibling.
The Correlation Between Bitcoin and Ethereum
Bitcoin, being the first of its kind will always hold most of the weight in the broader cryptocurrency market. Therefore, whenever a new cryptocurrency gets created, it will always look to bitcoin as being the broader indexing model to determine the direction in price. Bitcoin is the barometer of investor sentiment regarding digital currencies overall.
Ethereum, being the second cryptocurrency ever created, only has bitcoin that it can look to in a speculative market. Therefore, the price action often looks very similar when comparing the price charts of Bitcoin (BTC/USD) and Ethereum (ETH/USD).
Bitcoin Fundamentals
The idea behind bitcoin was to create a decentralized digital currency that can be used as an alternative to centralized central bank-controlled fiat currency. Its value is derived from its supply and demand.
Many early bitcoin adopters believe that bitcoin will one day be the new world’s currency and that the world’s population will begin to only use bitcoin as a means of exchange. We have yet to see the major adoption of bitcoin as a unit of exchange. Most people currently use bitcoin as a store of value which increases the demand. There is only so much bitcoin available, which means the supply runs out over time, so investors seek to buy up as much bitcoin as possible. They believe that the price of the asset will only increase in the coming decades.
Ethereum Fundamentals
Ethereum was created with a bit of a different goal in mind compared to its older sibling. Blockchain technology can be used to create applications such as smart contracts and decentralized apps otherwise known as Dapps. Ethereum enables the use of such programs and allows developers to build and run these applications.
Whilst Ethereum is traded as a digital currency, it is also used to run applications. This is how it differs from bitcoin. Bitcoin and Ethereum currently use a consensus protocol called Proof of work, or POW. POW allows the nodes of both networks to agree or disagree on the current states of both networks. This process helps prevent attacks on the respective blockchains and helps secure both networks.
Understanding Market Capitalization and Market Dominance
Market cap is the value of all the shares of a specific company. For example, a company with 1000 shares selling at $20 a share would have a market cap of $20,000,00.
When we look at Bitcoin’s market cap, it is the total value of all the Bitcoins that have been mined thus far. So, we would multiply the current number of coins by the current price. This number would be the current market cap. The same would work for Ethereum.
It is important to note that according to their market caps, Bitcoin is still number one and Ethereum is number two. You can see this across every major cryptocurrency exchange. At the time of writing this article, the entire cryptocurrency market cap is sitting under one trillion dollars.
Bitcoin and Ethereum together dominate 60% of the entire cryptocurrency market.
Bitcoin dominates at 40% and Ethereum dominates at 20%
Remember, there are thousands and thousands of cryptocurrencies so we can see how major the top two are when looking at the cryptocurrency market from a zoomed-out approach
Speculation VS Utility
The value of a stock is derived from the utility of the company in the real world as well as the supply and demand for the number of shares in the market. Although some cryptocurrencies may have actual real-world utility, it is not enough to enable the movement of price just yet. The prices are all fueled by speculation and investor sentiment. Investors in Ethereum will look to see what the price of bitcoin does before deciding whether to buy or sell.
Bitcoin’s price is also currently determined through supply and demand. Therefore, we see the broader cryptocurrency market following the price movement of Bitcoin.
Understanding Altcoins and Altcoin Season
What are altcoins?
Altcoins are digital forms of cryptocurrency. They are in the same market as Bitcoin. Both are cryptocurrencies. The only difference between Bitcoin and Altcoins is that altcoins are essentially any cryptocurrency coin that was created after Bitcoin.
Altcoins are alternative coins to Bitcoin. Therefore, Ethereum is an altcoin and is considered the largest altcoin by market cap.
What is Altcoin Season (Alt Season)?
Bitcoin will initially have a bull run. This means that the price of bitcoin itself as an asset will increase rapidly. Many people will be making money off of bitcoin by buying it low and selling it at a higher price. While this is happening, altcoins will also be moving up a few percentage gains but not as much as Bitcoin. Once Bitcoin has peaked and has reached its top, or has found a new resistance level, investors will then secure their profits made from Bitcoin and begin moving their funds across the cryptocurrency market into other alternative coins. When this happens, the altcoins could possibly get a turn to run up in price.
As the market cap of the altcoins collectively is smaller than the market cap of Bitcoin, the opportunity for large percentage gains is very high. Investors seek out this opportunity and thus a run-up in price and a bull market begins for the altcoins. This run-up in price that occurs only with the Altcoins is commonly referred to as Altcoin season.
Altcoin Season (also commonly referred to as Alt Season) occurs when the dominance of Bitcoin over the entire Cryptocurrency market decreases.
At any given time, Bitcoin holds over 40 percent of the crypto market. So, when this dominance decreases, there is always the speculation that bitcoin holders are selling and are then moving their funds across into the altcoin market which then gives rise to an Altseason. Ethereum is the second largest coin and usually the altcoins leader. So, when we have an altcoin season, Ethereum becomes the leader, and the rest of the altcoins will follow Ethereum in price action.
Where can you buy altcoins?
Altcoins are available for purchase on various cryptocurrency exchanges. If you are looking for a particular altcoin to buy or trade, then you should look for a reputable cryptocurrency exchange that holds and trades the altcoin/s of your choice. Once you find the right exchange, then I would suggest doing some research on it. There are unfortunately a lot of scams in this industry as it is still nascent. Once you have performed your due diligence on the selected exchange and you feel that they are a trustworthy company, then you can go ahead and open an account with them. Once your account has been opened, you can buy, hold and trade altcoins.
The Crypto Market Cycle
There is usually a technical process that the crypto market follows when increasing and decreasing in price. Bitcoin is the leader of this cycle, Ethereum follows, and then the altcoins follow Ethereum.
Below are the four phases that the cryptocurrency market goes through. (put these phases as individual H3 headings)
Accumulation Phase
Bitcoin and Ethereum prices are stagnating in a tight range after the market has bottomed out. Investor sentiment is low, and it is during this period, that smart money is buying up the cheap prices of these digital assets. This is otherwise known as ‘Buying the dip’
Run-Up Phase (Bull Market)
This is when Bitcoin begins to start moving up in value. The prices are making higher highs and Ethereum is following suit. Positive Investor sentiment returns.
Distribution Phase
This is where the prices have started to plateau. The upward momentum slows down. Sellers being to step into the market. Positive investor sentiment becomes mixed. This period usually marks the peak of the market, and this period is overrun by emotion. Investor greed still hopes for higher prices, but the sellers have already begun to dominate and soon these prices will begin to fall.
Run-Down Phase (Bear Market)
This is the last phase of the cycle. Bitcoin starts to tumble first, and Ethereum follows shortly after, which then results in the rest of the Altcoin market tumbling. This is when we see Prices fall and investor sentiment turn into fear. People begin to sell in this panic resulting in a loss and liquidation of their accounts. Once this phase ends, we then see the market switch back into the Accumulation Phase.
How Long Will Bitcoin Remain the Leader For?
Many people believe that Bitcoin will be number one forever. Others feel that Ethereum will eventually take the number one spot.
This idea has formed a popular term online and would be called ‘The Flippening’. This would happen when the market cap of Ethereum flips that of Bitcoins. Whether this happens or not, the fact remains that Bitcoin is still number one and Ethereum is number two. Speculation still drives the price of both significant assets and utility is not a factor yet.
Conclusion
Cryptocurrency is still a baby compared to the world’s major stock markets or currency markets. Bitcoin and Ethereum will forever be bonded over the fact that they were the very first two to enter the market. But one day, we will reach a point where utility drives prices and speculation is no longer a factor. When this happens, the prices of the two assets will no longer correlate and we will finally see Ethereum break away from its older sibling.
