Bitcoin’s price has rebounded in recent days after hitting an all-time high of $69,000 on Nov. 12 and then dipping to below $35,000 on Jan. 24. In its wake, it sweeps away the entire crypto market. “Major cryptocurrencies often trade similarly as investor sentiment shifts based on macro news, regulatory oversight, and general adoption of digital assets,” said Giulia Mazzolini, chief executive of the exchange. BitPanda in France.
The correlation between the price of bitcoin and the price of other cryptocurrencies, called “altcoins”, is therefore strong. It appears even more important between bitcoin, the first capitalization of the sector, and ether, from the Ethereum blockchain and second capitalization. The two cryptocurrencies alone represent around 60% of the market, including 40% for bitcoin and just under 20% for ether. “As soon as there is a movement in the crypto market, bitcoin is often at the origin”, specifies Stanislas Barthelemi, consultant at Blockchain Partner, owned by the consulting firm KPMG.
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Altcoins rise and fall faster than bitcoin
Although very volatile compared to “traditional” assets, the price of bitcoin nevertheless appears less erratic than the prices of most other cryptocurrencies, due in particular to higher volumes traded for the asset founded by the mysterious Satoshi Nakamoto. The buying or selling of a few investors can cause the price of less prominent and less traded altcoins to rise or fall sharply than cryptocurrencies like bitcoin or ether.
Moreover, the variations are generally stronger for altcoins, including ether. “When there is a bull market, ether and other alternative cryptocurrencies generally outperform bitcoin. When you get out, conversely, they often fall more quickly,” recalls Stanislas Barthelemi.
In addition, the crypto market has been experiencing a form of rotation since the summer of 2020, as there is in the equity markets, when investors bet on a particular sector before turning to another potentially more buoyant one. Sub-sectors are thus beginning to emerge in the crypto universe. “We were able to observe four successive phases: DeFi, alternatives to Ethereum, play-to-earn and then the Metavers in turn seduced investors”, according to Stanislas Barthelemi.
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Spins and cryptos more popular than others
In the summer of 2020, the decentralized finance (DeFi) sub-sector thus began a clear ascent and outperformed the rest of the market. DeFi refers to the multiple financial applications that are developing in particular on the Ethereum blockchain technology, allowing, among other things, loans in cryptocurrencies, with projects like Aave or Uniswap.
“Then DeFi-linked digital tokens fell back against ether and performed worse,” the analyst notes. Cryptocurrencies linked to alternative projects to Ethereum, such as Cardano and Solana, then took over, from the beginning of 2021. These “Ethereum Killers” try to compete with the Ethereum infrastructure but still remain far behind in terms of of capitalization.
A little before the summer and until the beginning of the fall of 2021, tokens linked to “play-to-earn” (“play to win”, in French) have in turn become trendy, with projects like Axie Infinity and Illuvium which allow you to obtain NFTs (non-fungible tokens) within video games.
Finally, Facebook’s decision to rename itself Meta at the end of October signaled the beginning of the euphoria around the metaverse. Investors then favored tokens like Mana and the Sand, tied to the Decentraland and The Sandbox metaverses in development.
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Be careful not to launch just before the wave falls
It is difficult to know which cryptocurrencies could benefit from the next rotation. “The tokens linked to Ethereum’s layer two protocols, several of which are to be launched soon, could be next,” imagines Stanislas Barthelemi. Layer 2 networks must be added to the Ethereum infrastructure, as an overlay, with the aim in particular of improving the fluidity of transactions on this blockchain which is beginning to saturate.
“Be careful not to start a rotation too late”, however, warns the Blockchain Partner consultant, at the risk otherwise of buying digital tokens at a high price and then suffering the fall in prices. “If we start entering a crypto sub-sector only when mainstream articles appear on the subject, it is surely already too late.”
This type of risky investment is still reserved for professionals who follow crypto news very closely. But in the future, if sub-sectors grow and take hold within the crypto industry, prices could become less volatile, more readable for investors. And the evolution of the value of certain cryptocurrencies could be much less correlated with the price of bitcoin.
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