Traders may switch to altcoins after Bitcoin bull run

Whenever there is a price increase or decrease, altcoins will go up or down with higher volatility

by AFIQ AZIZ / pic credit: bitcoinist.com

AS BITCOIN’S price rally retreats from historic highs, the strong performance of other cryptocurrencies indicates traders and investors may now be turning to alternative coins (altcoins) for potentially high returns.

CoinDesk Research noted that as of Jan 11, the price for Bitcoin was about 87% of its previous all-time high in December 2017, when the leading cryptocurrency was testing the US$20,000 (RM80,800) mark.

Yet, other crypto units were still far from their highest prices on record.

One possible implication is these tokens may still have potential to head higher amid the latest bit- coin’s bull run, CoinDesk noted.

Bitcoin price had gone south by 18.9% from its all-time high of US$41,940 on Jan 8 to US$33,919 yesterday.

Other six cryptocurrencies or altcoins, sequenced by market capitalisation, only recorded their all-time high the past three years and below.

For instance, etherum — which has a crypto market share of 12.8% after bitcoin — hit an all-time high in January 2018 of US$1,448, compared to US$1,051 as of yesterday.

Tether coin, with 2.6% of market domination, was trading at US$1 now compared to US$1.32 in July 2018.

Ripple, the fourth-biggest currency, is, however, expected to struggle to gain investors’ confidence following the lawsuit by the US Securities and Exchange Commission in December 2020.

Last month, Ripple Labs Inc and two of its executives, who are also significant security holders, allegedly raised over US$1.3 billion through an unregistered, ongoing digital asset securities offering.

Litecoin, cardano and bitcoin cash were trading 62.7%, 75.7% and 87.6% lower compared to their all-time high about three years ago.

CoinGecko COO Bobby Ong said typically, altcoins tend to mirror bitcoin price movement as bitcoin is the reserve currency of cryptocurrencies.

“Many altcoins are traded against bitcoin and the altcoin or bitcoin trading pair ratio is usually closely observed by traders.

“Whenever there is a price increase or decrease, altcoins will go up or down with higher volatility. This is because altcoins usually have less liquidity compared to bitcoin,” he told The Malaysian Reserve (TMR) in a text reply.

Ong said one trend observed is that whenever there is a price increase in bitcoin, altcoins’ price increase will usually “lag” the price action in bitcoin.

He explained the larger market capitalised altcoins will go up first before being followed by the smaller market capitalised altcoins.

“However, when there is a price decrease, altcoins and bitcoin will all go down in unison at the same time,” he added.

For the record, bitcoin has historically been the most dominant digital asset and is often viewed as the “reserve currency” of the digital asset world.

For instance, even when the price of crypto units crashed in 2018, bitcoin managed to perform better as a store-of-value against smaller altcoins, many of which have lost most of their value and never recovered, said Luno Malaysia Sdn Bhd country manager Aaron Tang.

“One of the factors around this relationship is that large positive bitcoin price movements attract a lot of attention — particularly among retail investors.

“However, many new investors may be intimidated by what seems to be an extremely ‘high’ bitcoin price.

“This often leads to investors deciding to invest in other digital assets (ie altcoins), which may be perceived to be cheaper and have more potential,” he told TMR in an email.

“Note that this is a common perception among investors, and may not actually be true,” Tang explained.

Additionally, Tang said it has been suggested large bitcoin price movements allow long-term investors to take profits, who then diversify some of their gains into altcoins which they believe are promising.

“There have been altcoins that have performed spectacularly. For example, in the DeFi boom of 2020, some of the DeFi-related altcoins went up by more than 100 times.

“Some factors that influence altcoin prices include the technology behind the altcoin, the team and marketing efforts.

“But of course, market acceptance is the ultimate test: If the altcoin does not find much demand and use among the crypto community, its price will not do well,” Tang added.

DeFi, an acronym for decentralised finance — is an umbrella term for a variety of financial applications in cryptocurrency or blockchain geared toward disrupting financial intermediaries.

Most applications called themselves “DeFi” are built on top of ethereum, the world’s second-largest cryptocurrency platform, which sets itself apart from the bitcoin platform in that it’s easier to use to build other types of decentralised applications beyond simple transactions.

In February last year, the total value locked in DeFi applications exceeded US$1 billion for the first time. By late October, it had hit US$12 billion.

The industry attributed the growth to the increasing willingness of traders to speculate on this nascent and largely experimental sector.

But activity in DeFi is now showing signs of slowing down, with the volume on decentralised exchanges starting to drop off.

Tang noted that investing in altcoins comes with high risk and high volatility — even more so than investing in established digital assets like bitcoin.

The Securities Commission Malaysia has currently only approved four digital assets for trading, which are bitcoin, ethereum, litecoin and ripple.

“For investors who are new to the space, we would recommend them to start learning about bitcoin first, as it is the oldest and most established of all digital assets,” Tang concluded.


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