Bitcoin is by far the most well-known cryptocurrency. It is the longest-running, has the most liquidity, and some of the best security features available. So why it’s easy to see why just about anyone would want to own bitcoin, it can be a bit mystifying as to why anyone would delve into altcoins- especially if you’re new to cryptocurrency.
While bitcoin is definitely a stand-alone cryptocurrency, the price of the famous coin can affect the price of other cryptocurrencies, called altcoins, in a few different ways. And vice-versa. Sure, this may all seem a bit overwhelming to the newer trader, but thanks to brilliant articles (such as this one, obviously), a dedicated online community, and trading platforms designed to help guide newbs like Bitvavo, bitcoin price can finally be decrypted.
In reality, most exchanges- where you can trade that cold hard cash (fiat) for cryptocurrency only deal in a scarce few types of cryptocurrencies. The most common, by far, is bitcoin. With altcoins like Ethereum, Litecoin, and Ripple taking up the rear.
This means that anyone who wants to buy any other type of altcoin must first purchase Bitcoin or another fiat to crypto pair. It probably comes to no surprise that most people default to bitcoin at this stage. So, say you’d like to purchase some of the ultra-hip and definitely crypto-trendy Monero. An altcoin that is hyper-focused on security and anonymity.
Unfortunately, you can’t just jump on the web and immediately start exchanging your dollars for Monero. Instead, you’ll have to start with a more popular cryptocurrency like bitcoin, and then exchange that currency for the Monero your dark digital heart desires.
This gateway requirement can easily affect the price of bitcoin and other cryptocurrencies- even if you’re only holding these coins just long enough to make the exchange. This largely has to do with the artificial scarcity that gives bitcoin the bulk of its baseline value.
Hedging is a trading hack that can cause the price of bitcoin and altcoins to soar and sink. Depending on which way the ratio is tipped. Stay with us.
Many seasoned investors protect their fiat-based assets with crypto. Largely because the Dow works in almost complete juxtaposition to bitcoin. As a general rule, should a populace begin to lose faith in their fiat, or any of the supportive businesses, prices of bitcoin soar. This is largely because bitcoin was specifically designed to offer a better choice of global currency, that couldn’t be manipulated by governments or global politics.
Back in up your regular investments with Bitcoin isn’t such a bad idea, and has been seen being practiced more and more often. So hedging, in finance, is essentially akin to taking out an insurance policy on your investment. Should bitcoin price become wildly volatile (as it normally does) and should the bitcoin to altcoin trading ratio remain mostly stable (as it often can), one can essentially exchange bitcoin for altcoin and hold their investment as an altcoin until the market stabilizes.
Supposing the trading ratio remains stable, so should your investment. The more opportunities that bitcoin and altcoins have to provide financial safe havens for investors, the more value each coin should hold. Making this one of the biggest influencers of the correlation between bitcoin and altcoin prices.
Keeping in mind, that should you hope to use those altcoins as a quiet harbor for your bitcoin, storms do happy and jetties can get breached. Or, in plain English- you can actually end up losing money using altcoins as a bitcoin hedge.
This is partly because pretty much every investment is a gamble, and partly because if the bottom falls out of bitcoin, altcoins are likely to react in the same way. So the trading ratio between bitcoin price and that of altcoins can often be a bit difficult to predict. Although, because these two values tend to mirror one another, trading ratios generally stay fairly stable. Giving investors who want a bit of a thrill the ability to play around in different crypto markets without getting burned.
We have yet to see a day where any other altcoin dominates the crypto markets quite like bitcoin. Which is largely why the price of bitcoin remains wildly volatile, but it’s proponents stay firm fanatics. Bitcoin is an industry leader for a number of reasons.
It’s the most trusted crypto coin as well as the most widely implemented. Meaning that just about everyone can enjoy fairly simple and straightforward access to this coin. It’s super user-friendly, so someone who doesn’t know much about the wide world of computers or cryptography can still use the coin without much distress. So why would anyone use an altcoin anyway?
Well- for starters, some traders like the thrill of the volatility that altcoins provide. As often, these lesser-known coins can be bought for pennies and traded for pounds. Which is unlikely to ever happen again in the established market of bitcoin. The downside to this gold rush type market is that many altcoins aren’t as established as bitcoin- making them far more vulnerable to a cyber attack.
Despite this, altcoins also generally offer the public something that bitcoin can’t. Either an innovative software or business perk, like the Ethereum platform or its smart contract capabilities. Making it a tough choice for many investors.
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