Why does crypto follow BTC? Crypto correlation explained
Crypto traders and users can see a close correlation between Bitcoin and other cryptocurrencies.
When BTC goes down, other altcoins also drop in value, and vice versa. We have analyzed the main reasons for this collective behavior:
Shared market maker
A market maker is responsible for the rate stability of many tokens. It is a market player that manages the order book and some of the trades to avoid liquidity problems. We extensively covered the market maker concept here.
There are a large number of market makers in the crypto market. Each exchange chooses a particular market maker based on its goals and budget. If different projects have the same market maker that follows a template principle of work, their assets will strongly correlate with each other.
Common audience
The market is driven either by whales or lemmings.
This phrase goes well with a lot of assets. If different cryptocurrencies are held by the same market segment (e.g. retail investors, institutional investors, banks and venture capitalists, users attracted by social media ads), they roughly manage their portfolio of assets in the same way. Thus, in times of panic, the price of such cryptocurrencies can drop simultaneously, and in times of greed, they can rise.
The main channels used by crypto projects to gain an audience include ads, crypto exchanges, launchpads, and their affiliate platforms. If several projects attract users using the same channels, they are more likely to have a price correlation.
BTC influence
BTC is the largest cryptocurrency by market cap. This also affects the correlation of many coins with bitcoin, since it is a direct reflection of supply and demand in the market.
Institutional investors, investment banks, and funds usually invest in BTC. That's why BTC sets the news background, followed by the other assets.
In the spring-summer of 2022, BTC had a strong correlation with the stock market, namely to S&P 500. This was logical because many stock traders invested in the main cryptocurrency at that time. Later, as new players entered the market and the audience was diversified, BTC's correlation with traditional markets decreased drastically.
However, correlation with BTC can be avoided. Bitcoin has the least impact on the following assets:
• Coins that have just entered the market and got listed recently;
• Altcoins that are traded exclusively on DEXes;
• Those that have low liquidity, small market cap, and a few holders;
• Assets that actively develop, maintaining their "own" news background.
In trading, correlation helps you understand which assets are stable market participants with their own goals and product, and which always follow market sentiment, which proves to be stronger than the internal product of the project.
