At the beginning of 2021, we could have darted a target with a list of cryptocurrencies to create an investment portfolio in Altcoins (alternative cryptocurrencies to Bitcoin and Ether). In less than a week, we would have seen its value multiply significantly. The well-known “Altcoin Season” (Alt Season, in English) is gone for now, with most digital crypto assets currently falling in value against Bitcoin. So let's take a closer look at where the real opportunity lies in the meantime...
What exactly is an Altcoin season?
The chart below shows Bitcoin's dominance over the entire cryptocurrency market, also known as bitcoin dominance (BTC.D). When the ratio is trending downward, that means that investments in cryptocurrencies other than Bitcoin mostly increase in value compared to Bitcoin. This is known as an Altcoin Season. During these periods, we can make much more money with an investment in alternative cryptocurrencies than with Bitcoin alone.
The decline in dominance signals the optimal point to make an investment in Altcoins.
But when Bitcoin dominance goes up, it works the other way around. The king takes the reins and Altcoins bow, so in those periods, it would have been much better to have bitcoin. Of course, that does not mean that the conditions for starting these movements are always met. For example, Bitcoin could be falling against the dollar, as has been the case lately, while investments in alternative cryptocurrencies may suffer many more losses. The following table sets out the different relationships between Bitcoin dominance and price, along with the impact they have on investing in alternative cryptocurrencies.
Bitcoin dominance cycle. Source: Forumbits
What does Bitcoin dominance tell us?➗
Bitcoin's dominance fell sharply during the recent cryptocurrency bull rally. From a high near 74% in December 2020 to a low of 39% in January of this year. Right now, it is near 46% and is in a new uptrend – making higher highs and higher lows. The chart below shows what's going on here, with each bar representing a week's movement in the metric.
Bitcoin dominance can hurt investment in Altcoins.
While Bitcoin's dominance may recede from time to time in the short term (as Altcoins briefly bounce against bitcoin), it certainly appears to already be at a long-term low. In other words, Bitcoin season is upon us, so we may be waiting a while for alternative cryptocurrency investing to steal the show.
What drives Bitcoin's (relative) strength?
On the one hand, inflation has risen, so the Federal Reserve (Fed) and other central banks are raising interest rates and adjusting their balance sheets to try to cool those price increases. And while Bitcoin hasn't performed as well as an inflation hedge lately, it is still perceived as the best inflation hedge in cryptocurrencies. There is also much less cash available to inflate investment in higher risk cryptocurrencies. On the other hand, institutional investors are much more comfortable with bitcoin than smaller-cap altcoins. Bitcoin has been battle-tested longer, is generally less volatile, and has a much larger market size than the rest. And we've seen this recently with on-chain data, where the largest whales (probably institutions) They have been buying the dip in bitcoin.
Whales buying during the fall. Source: Glassnode
The crypto market also tends to follow a natural cycle. When in a bear market, like now, Bitcoin absorbs many of the Altcoins as investors favor bitcoin's relative price stability. Then, at the beginning of crypto bull markets, investors tend to introduce their most experienced player (i.e. Bitcoin) first. Next come the larger “layer 1” protocols, such as Ethereum, Solana and Polkadot. And finally they will give playing time to the most speculative projects, smaller in size and with greater upside potential. This is because, in general, once investors have benefited from investments perceived as "safer," they are inclined to take on more risk. Let's think about the end of 2020, for example, when Bitcoin went from $10.000 to $40.000. Most Altcoins lagged behind, even though they were still gaining value against the dollar. Then, in the first quarter of 2021, Bitcoin went from $40.000 to more than $60.000 while investment in smaller capitalization cryptocurrencies multiplied and multiplied.
Is investing in alternative cryptocurrencies at a good entry point?
If past cycles are anything to go by, there might be an easy way to combine all of this. When the bull market finally roars back, Bitcoin will likely lead the charge at first, so it might be worth accumulating more Bitcoin than Altcoins now at these lower levels. It is also the safest play while we are still in this bear market as alt cryptocurrency investment could fall much more than Bitcoin as it tries to find a bottom.
Therefore, investing in Bitcoin is not only less risky at the moment than an investment in alternative cryptocurrencies, but could also generate more upside in the early stage of the upcoming Altcoins season. Later, when Bitcoin's dominance is much stronger, it might be worth switching over to making an investment in different cryptocurrencies. Real crypto fortunes are made in bear markets, not bull markets, by gradually buying projects with excellent fundamentals when they are cheap. But the Bitcoin dominance chart suggests that most (but not all) Altcoins could still get much cheaper relative to Bitcoin in the coming months. So, on the bright side, there may still be plenty of time to double down on our investment in alternative cryptocurrencies to Bitcoin.