The price of Bitcoin has risen in recent days after reaching a record high of $ 69,000 on November 12 and then falling below $ 35,000 on January 24. In the wake, it sweeps the entire crypto market away. “Larger cryptocurrencies often act in the same way as investors’ sentiment shifts based on macro news, regulatory oversight and the general introduction of digital assets,” said Giulia Mazzolini, CEO 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 seems to be 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 about 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 in its infancy,” explains Stanislas Barthelemi, a consultant at Blockchain Partner, owned by the consulting firm KPMG.
Altcoins are rising and falling stronger than bitcoin
Although the price is very volatile compared to “traditional” assets, the price of bitcoin nevertheless appears erratic than the prices of most other cryptocurrencies, especially due to larger volumes traded for the asset founded by the mysterious Satoshi Nakamoto. Buying or selling 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, they often fall faster,” Stanislas Barthelemi recalls.
In addition, since the summer of 2020, the crypto market has experienced a kind of rotation that exists in the stock markets when investors bet on one particular sector before turning to another potentially more lively one. Sub-sectors are thus beginning to emerge in the crypto universe. “We were able to observe four consecutive phases: DeFi, alternatives to Ethereum, play-to-earn and then Metavers in turn seduced investors,” according to Stanislas Barthelemi.
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Spins and cryptocurrencies more popular than others
In the summer of 2020, the decentralized finance (DeFi) sub-sector thus began a clear upswing and performed better than the rest of the market. DeFi refers to the many financial applications that are developing especially on the Ethereum blockchain technology, which among other things allows loans in cryptocurrencies with projects such as 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” are trying to compete with the Ethereum infrastructure, but are still far behind in terms of capitalization.
Just before the summer and until the beginning of autumn 2021, tokens linked to “play-to-earn” (“play to win”, in French) have become trendy, with projects such as Axie Infinity and Illuvium making it possible you can get NFTs (non-fungible tokens) in video games.
Finally, Facebook’s decision to rename itself Meta in late October signaled the beginning of the euphoria surrounding the metaverse. Investors then preferred tokens like Mana and the Sand, tied to Decentraland and The Sandbox metavers under development.
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Be careful not to launch just before the wave drops
It is difficult to know which cryptocurrencies can benefit from the next rotation. “The tokens attached to Ethereum’s layer two protocols, several of which are due to be launched soon, could be the next,” suggests Stanislas Barthelemi. Layer 2 networks need to 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,” the Blockchain Partner consultant warns, however, with the risk of otherwise buying digital tokens at a high price and then suffering from the price drop. “If we only start going into a crypto sub-sector when regular articles pop up on the subject, it’s definitely already too late.”
This type of risky investment is still reserved for professionals who follow cryptocurrency news very closely. But in the future, if sub-sectors grow and take hold of the crypto industry, prices may become less volatile, more readable for investors. And the development of the value of certain cryptocurrencies may be much less correlated with the price of bitcoin.