With the steep drop in bitcoin’s price from a high of 20k on 12/17/17 to it’s current level of around 9k, much comment has been made of how BTC’s daily price moves are affecting prices in nearly all cryptocurrencies and tokens. While anyone refreshing coinmarketcap.com frequently over the past three months would tell you about as much, why does this effect exist?

Doesn’t each coin have it’s own set of technology, it’s own community, and it’s own progress to report in terms of adoption? I think there are two main reasons BTC is so dominant in driving the current market.

Many cryptocurrencies are traded paired against BTC

Presumably due to the additional infrastructure necessary to support fiat currency trading, many large cryptocurrency exchanges only allow you to trade crypto for other crypto, rather than crypto for fiat. At this moment, only 4 of the top 10 exchanges on Coinmarketcap (i.e. GDAX, Bitfinex, Kraken, and Bitstamp) allow fiat trading.

BTC is used as the default pairing for many currencies, because as the oldest and most well-known currency, it typically has the most users willing to transact in it, reducing trading costs vs. less popular alternatives. Many traders and investors evaluate their cryptocurrencies as a multiple of BTC (e.g. ETH-BTC is currently trading at .075). When the price of BTC rises or falls, the prices of altcoins tend to be dragged up/down as a result.

2. Few cryptocurrencies have viable metrics to aid valuation, and valuation models are not well understood

In the absence of robust business metrics non-reliant on speculative interest, cryptocurrencies will be driven by speculative interest in cryptocurrencies, of which Bitcoin is by far and away the best current proxy.

Contrasting to more traditional investments, models are fairly common for valuing stocks and bonds — namely, project future cashflows, and then estimate the values of these cash flows based on assumed interest rates.

Valuation models have been attempted for cryptocurrencies (e.g. based on burn rates or transaction volumes), but these models are flawed due to their reliance on volatile inputs such as speculative trading volume.

Trading platforms — burn rates for crypto trading platforms rise and fall sharply based on public interest and adoption of cryptocurrency… the single best proxy of which in the short term might be… Bitcoin(!!).

“Pure” cryptocurrencies — pure payments-focused cryptocurrencies such as Nano or even privacy-oriented ones such as Monero generate most of their transactions from volatile speculative flows, rather than more stable demand sources such as everyday payments (e.g. demand from paying recurring bills). Even using Metcalfe’s law, if transactions are driven by trading activity and interest in crypto/BTC generally, then BTC will still dominate.

Platforms (for smart contracts/digital identity) — platform currencies like Ethereum are currently unscalable or otherwise unready to support widespread real use cases (games don’t count), so demand is coming from trading money rather than recurring demand from businesses or users paying for services.

Blockchain-based companies — companies like VeChain may have promising technology and may be growing partnerships, but as revenue figures are as of now small or non-public, price can’t be driven by business metrics. Even if metrics were known, there is significant uncertainty in future projections, based on the lack of existing business models.