When Bitcoin plunged close to 40% back in the middle of December, Ripple took off, quadrupling in value in a matter of days to take second position among cryptocurrencies in terms of market capitalization. Meanwhile, other cryptocurrencies rallied in sympathy. Like Ethereum, Litecoin, and Bytecoin—to mention but a few.
Then, as Ripple and other cryptocurrencies corrected in the last couple of days, Bitcoin rallied.
“I wouldn't read too much into it,” says cryptocurrency expert Kyle Samani. “The crypto market is 99% noise right now. In general, we see rotations between BTC and alts. First half of 2017 was alts, 2nd half was bitcoin, seems like we're back in an alt cycle.”
There’s a good explanation behind the rotation among Bitcoin, Ripple, Ethereum, and other cryptocurrencies. Some cryptocurrency exchanges require Bitcoins to pay for coin transactions. So, investors who already own Bitcoins have to sell them to execute those transactions.
[Ed note: Investing in cryptocoins or tokens is highly speculative and the market is largely unregulated. Anyone considering it should be prepared to lose their entire investment. Disclosure: I don't own any cryptocoins or tokens).
Rotation from one coin to another isn’t new to investing. It has for years been applied on Wall Street, where investors rotate funds between “defensive” and“cyclical stocks,” at times when interest rates, ie the “opportunity cost” of money, remain low.
That’s bullish for stocks, because it confirms that money is staying within this asset class rather than moving back into money market investments.
And that’s bullish for cryptocurrencies, provided that interest rates remain low, and the hype for this new asset class remains alive for some time to come.
Still, cryptocurrencies are radically different than traditional assets. There’s no cash flow to determine their intrinsic value (though various efforts have been made to calculate the value of Bitcoin by using the Quantity Theory of Money). And that makes it difficult to determine whether a certain cryptocurrency is overvalued or undervalued, in the short-term, and viable in the long-term.
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