Is Bitcoin Strangling The Other Cryptocurrencies? - Part 1

Bitcoin has had a helluva week. And many of its fans see its recent spike as just the beginning of a run that converts it from cult favorite to global reserve currency.

bitcoin strangling other cryptos

That’s an exciting prospect for a lot of reasons. But it’s not yet a done deal.
One of the many concerns that non-HODLers have about bitcoin is that its algorithmically-constrained supply might be a kind of mirage, because other cryptocurrencies with similar characteristics and utility can be created in infinite numbers.

From a trader’s perspective, here’s what that means: If bitcoin keeps rising relative to, say, ethereum and litecoin, it creates an arbitrage in which investors sell bitcoin and reinvest their profits in much-cheaper but otherwise similar – and therefore equally attractive as a store of value – coins. So bitcoin’s price falls (or at least rises more slowly) while ethereum and litecoin gain ground. The crypto universe diversifies and expands, partially at bitcoin’s expense. And bitcoin, while still successful, misses its chance to conquer the global monetary system.

The other day I mentioned this concern to a very smart, highly committed bitcoin fan, and his response (I’m paraphrasing a bit) was: “Those other coins are trash. Bitcoin is draining all the air out of the crypto space. The others will die and bitcoin will absorb their market cap, along with most of the capital now in gold and the dollar, on its way to a price of $1 million per coin.”

That’s … compelling, considering that you hardly ever hear about those other coins anymore.

One way to check this, of course, is to see what the other coins are doing. If they’re falling as bitcoin rises, then yes, this might indeed be a one-horse race and those comparisons of bitcoin’s tiny-by-design supply to the number of US dollars, ounces of gold, etc., that yield insanely high bitcoin prices look more valid. If, on the other hand, smaller-cap cryptos are taking wing along with bitcoin, then the jury is still out on whether bitcoin’s “supply” is limited to its own ledger or has to include the rest of the crypto space. Which makes its supply theoretically unlimited just like any crappy fiat currency. So let’s go to the charts:

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