Why are Altcoins linked to Bitcoin?

Why are Altcoin prices linked to Bitcoin? We've seen time and time again that Bitcoin price dictates the overall direction of the market: if Bitcoin goes up, the altcoins go up with more volatility, if Bitcoin goes down, the altcoins go down with more volatility.

During the ongoing market crash this lesson is being drilled into the heads of traders yet again. What seems to be missing, however, is a satisfactory explanation as to why this is the case.

Instead the common sentiment is : "This is why Bitcoin is king", "Altcoins are glorified Google spreadsheets", without the real explanation. I've covered this Bitcoin maximalism view here. In this article, however, I will give my own explanation for the "link" between Bitcoin and the altcoins that has nothing to do with technological superiority. In my opinion it is caused by two main state of affairs:

1. The exchange infrastructure is built around Bitcoin as a gatekeeper and therefore the price of Bitcoin dictates the overall trend of the market. Most exchanges use Bitcoin as the intermediary for buying and selling Bitcoin. Want to get into cryptocurrency? Buy some Bitcoin and get started. Want to get out? Trade your altcoins back to Bitcoin and transfer back to fiat. All the while paying a much higher exchange fee than the altcoins require. The more obscure the coin you want to purchase the more likely it is that you will be forced to purchase it for BTC. This state of affairs creates a "bottleneck" whenever Bitcoin price drops: the path to taking profit from your altcoins narrows down progressively. This for the most part creates the strange automatic crash of altcoins, whenever Bitcoin hits a downtrend.

2. The second reason is something close to Bitcoin being the current king. BTC held in 2017 an average of 40% of the total market cap in cryptocurrencies. In 2018 we have seen the first signs of this position being challenged, but in general Bitcoin is not merely the bottleneck, but in fact is a large part of the market itself. Therefore the falling price of Bitcoin means that large sums are being taken out from the market as a whole. If Bitcoin dominance stays at a similar level of dominance, the link between the altcoins and Bitcoin will remain as strong as it has been. So far we've yet to see money pour back into the market without pouring into Bitcoin first. A few attempts to dethrone king have been made and I am of the opinion that BTC dominance can be broken in a few years. It is unlikely to do so during 2018, however, because in addition to the above-mentioned, it is being supported by a number of psychological/political reasons for the current Bitcoin dominance:

First, the Bitcoin brand is known as the face of cryptocurrencies and is widely recognized as such by the crypto community. The failure of Bitcoin would in this sense mean the failure of cryptocurrency as a whole. This is one of the most widely discussed topics relating to cryptocurrencies in the mainstream media: "when will the bubble burst?". This outcome, in my opinion, must not necessarily be the case if Bitcoin is successfully dethroned, but as long as the majority sees this as the case, Bitcoin will be supported by most investors in cryptocurrencies.

Secondly, Bitcoin was the first cryptocurrency to gain mainstream adoption and greatly exceeded the expectations reflected in its low circulating supply. This makes Bitcoin a "success story" and dumb money is attracted to success stories. usually when its already too late. Notice that I'm not saying that dumb money invest in Bitcoin, but that dumb money invests in Bitcoin too late. Bitcoin enjoys the privilege of the
winner effect: it has been shown that animals form stable hierarchies partly by overestimating the threat posed by the previous winner. That is, until the tables are turned.

Thirdly, Bitcoin has a strong "veteran" community who have endured extreme price volatility and long hopeless bear markets. They have had plenty of time to spread information and create rich educational and promotional resources: Andreas Antonopoulos being perhaps the finest example. On the other hand, Bitcoin holders are suspect to greed and fallacious trading like everyone else and the overwhelming majority of Bitcoin holders are new to the game of cryptocurrencies. Bitcoin has also been under significant pressure with fall-outs such as hard fork Bitcoin Cash claiming to be Satoshi's true vision.

In short, however, Bitcoin has a lot going for it and is unlikely to be replaced from its position of dominance anytime soon. I would, however keep my eyes open to the possibility, there are no guarantees in crypto.