A common question asked in /r/CryptoCurrency is: "why do coins follow BTC?" or, alternatively, "why are all my coins moving with a similar/identical pattern?".

At a zoomed-out scale, this is not always true. Coins periodically detach from their correlation to BTC during "alt-seasons" or following project-specific news:

Correlation of Alts and BTC. 20th Sept 2020-20th Sept 2021. Data Source: CoinMetrics. Y-axis = correlation. 1.0 = perfect correlation. 0.0 = no correlation.

But on a day-to-day basis, a strong correlation to BTC can be observed for 95%+ of coins. Here are some reasons why, simplified:

Trading Pairs

Contrary to popular belief, the inherent value of cryptocurrencies is not primarily derived from USD or USDT, but rather BTC. 95% of cryptos have an X/BTC trading pair - and therefore BTC has a direct influence on the price of X.

Let's imagine a scenario where 1 BTC = 50 X. Or in more familiar terms, X is priced at $1000 and BTC at $50,000.

Next, BTC suddenly drops to $40,000 (a 20% loss). It's extremely unlikely that the 50:1 ratio between X:BTC has changed in such a short window of time - meaning X is now priced closer to $800 (a 20% loss).

This effect is significantly more pronounced for low-mid market-cap coins, which often only have an X/BTC trading pair i.e. BTC is the only way to purchase this coin. This means the price of these coins relies entirely on BTC itself having value.

For higher market-cap coins, this effect is partially diluted (owing to increasing numbers of alternative trading pairs e.g. X/XLM, X/ETH). Nevertheless, BTC's trading volume is huge, many traders continue to denominate in terms of BTC and many trade alts with the express purpose of buying additional BTC - meaning BTC continues to have a significant impact on all coins.

Dominance, Sentiment & Bots

BTC is the oldest crypto and currently accounts for ~42.5% of the total crypto market-cap - a number also referred to as "BTC dominance". BTC was the trendsetter for 10+ years, is rationally perceived as the leader of the cryptosphere and is often synonymous with "crypto" itself. In other words, the health of the market is tied closely to the success/failure of BTC.

BTC is also a strong indicator of market sentiment i.e. we've seen how BTC impacts the wider market, so we act based on this - in turn reinforcing the X/BTC correlation. This plays out either manually or automatically.

~70-80% of crypto trading may be performed by automated bots (Source) - all of which are algorithmically programmed to buy alts if specific criteria are met. Many of these criteria are solely based on the behaviour of BTC. For example, if BTC rallies, bots - at both the retail and institutional levels - immediately purchase alts. Essentially, the X/BTC correlation becomes a self-fulfilling prophecy.

Even without bots, you yourself likely keep a close eye on BTC in order to judge whether or not you should buy/sell alts.

The Future

Will this X/BTC correlation last forever?

As the crypto market matures, it is becoming more and more differentiated. Well-defined submarkets are arising, for example: DeFi, NFTs, supply-chain management, store of value etc. - each with their own leaders. In addition, alts such as ETH are rising in dominance.

Collectively, these are likely to further decouple alts from BTC. Nevertheless, BTC will remain a key player in the market for a substantial amount of time.