Data shows Polkadot’s price action has been a bellwether for Bitcoin in the past few months.
Polkadot (DOT) is seeing an impressive 180% gain in 2021 so far, surpassing XRP for fourth place by market capitalization.
Polkadot is a multi-chain protocol that has several “parachains,” similar to Ethereum Shards. DOT works on its proprietary technology called Substrate.
The platform is fully interoperable between different blockchains while maintaining the ability to process thousands of transactions per second. Substrate 3.0, which will bring Ethereum compatibility, is expected to launch in the first half of 2021.
Positive newsflow has been fueling the rally
According to Polkadot creator Gavin Wood, the emergence of projects like Acala and Moonbeam focusing on Ethereum compatibility helped fuel the growth in DOT’s value. Acala is Polkadot’s gateway into the decentralized finance (DeFi), while Moonbeam is an Ethereum-compatible toolkit for smart contract deployment.
Binance Labs announced on Feb. 9 a $2.4 million investment in Plasm Network, a Polkadot-based smart contract platform. Plasm is a leading parachain candidate supporting Ethereum and Layer-2 scaling solutions.
A week earlier, on Feb. 2, Manta Network closed a $1.1 million funding to create a fully private decentralized exchange (DEX) on Polkadot. It uses zk-SNARKs with Groth16 proofs, the same cryptographic technology used in Zcash (ZEC).
On that same day, the cryptocurrency provider of exchange-traded products (ETP) 21Shares replaced Bitcoin Cash (BCH) with Polkadot. Those investment vehicles are tradable on the Swiss SIX exchange.
Despite being listed at major exchanges less than six months ago, Polkadot token activity and price growth are mind-blowing. Its $700 million in daily transparent volume has matched major altcoins like Chainlink (LINK) and Litecoin (LTC), according to Nomics’ data.
What’s more intriguing is that DOT’s price action seems to be somehow anticipating Bitcoin’s over the past two months.
Altcoins usually mimic Bitcoin intraday price action
Usually, there is a very high intraday performance resemblance between Bitcoin and altcoins. That being said, occasional differences ought to be expected, but it is quite unusual for a pattern to repeat itself more than three times in a month.
Nevertheless, sometimes one of these altcoins anticipates BTC movements. For DOT, this effect can be partially explained by its lower trading volumes and the fact that 68% of the total supply is locked in staking wallets.
In the above example, the DOT price hike happened a whole three hours ahead of Bitcoin. More interestingly, its local top and subsequent rally also followed the same pattern.
Although decreased volume usually brings more volatility, this is not a reason for any given altcoin to front-run Bitcoin.
As shown above, DOT was the first to make new highs on Jan. 25. It was also the first one to initiate a downtrend. Sure enough, the two events displayed could have been an exception.
Oddly, this pattern seems to have repeated, although varying from three hours up to 22 hours in advance.
The above chart depicts another DOT rally and subsequent top that happened earlier on Dec. 29 and 30. Again, numerous factors could be behind these predictive Bitcoin movements by smaller cryptocurrencies, and some will not be replicated, thus creating false alerts.
Nevertheless, DOT’s assertive movements do seem unusual over the last two months.
Once again, DOT was able to front-run a BTC rally on Dec. 24 and 25 assertively. This time around, it failed to predict BTC top afterward. Nonetheless, it was served as a good pump indicator in the past few months.
Could the pattern be a strike of coincidence?
It’s almost impossible to pinpoint the cause and effect of such short-term trading distortions. Some large investment funds participating in diversified crypto baskets could explain the current unique price action.
The above correlation seems to be an odd coincidence rather than the result of a structured strategy, however. The same can be said for the many false positives and opposing movements that happened exclusively to DOT that Bitcoin did not replicate.
Of course, no one knows whether the Polkadot indicator will continue to be helpful moving forward. But keeping a close eye on it seems to be paying off for now.
by Marcel Pechman