I've been investing and trading in cryptocurrencies for around 6 months now. I would consider myself reasonably knowledgable on most things related to those subjects, but there is one thing that has always confused me.
'Why does the BTC value of altcoins drop more than Bitcoin does in a bear market?'
I am not talking about the dollar value of altcoins dropping, that is an easy one to understand. BTC is usually always the trading pair for any altcoin, so to sell an altcoin you usually have to first trade it for Bitcoin. Therefore if the dollar value of Bitcoin goes down, the dollar value of the altcoin also goes down. Simple.
In the US stock exchange all shared are linked to the dollar, and when the value of one corporations shares drop, traders then sell the shares and then buy a different stock in a different company. So when one share price falls, others are likely to rise to compensate.
However, what isn't simple to understand is not only does the dollar value of altcoins drop in a bear cycle, but the value of the altcoins in relation to BTC also drops significantly, doubling down on any loss. This seems counter intuitive to me. If you know the value of BTC was falling normally you would want to trade it for an altcoin that wasn't falling. The value of altcoins, especially the more established ones should go up during a bear market cycle for BTC!
Having thought about this, I do have a couple of theories as to why this might happen:
Self fulfilling prophecy - trading bots
I've chatted to quite a few people on trading telegram and discord channels and one reason given is as follows. Because in previous bear cycles the value of altcoins has dropped more than BTC, automated trading bots are usually configured so that if BTC falls by more than a set percentage (e.g. 5%) then the bot should sell all altcoins into BTC and ride out the dip. One thing I have noticed is that if BTC only drops a couple of percentage points, the altcoins don't experience a bigger dip. This theory is reasonable, though I doubt there are enough people with this setup configured to make the market for altcoins dip as much as they do.
The sky is falling
One theory I came up with as to why the altcoins drop more than BTC, is that there is a hidden belief among all crypto investors that the value of crypto is built on sand. Having been told multiple times by Warren Buffet that the value of crypto will return to zero, and despite strongly denouncing this in public, deep inside they fear this may be true. They know that the most stable of all crypto coins is BTC and understand that in stormy seas, the most likely survivor will be BTC. They see the value of BTC slump, so start trading their altcoins into BTC to protect their investment from annihilation.
I'd appreciate discussion on this down in the comments below. One thing I don't understand is that both of the above reasons would entail selling altcoins. Selling altcoins is actually buying BTC (in most cases), so why does this not prop up the price of BTC? Demand to buy BTC would increase the price.