Author: Brad Berbari
To fully understand altcoin market cycles, it is imperative to understand the Bitcoin dominance metric. Previously on our Twitter account (@thecryptofam), we posted threads dealing with the following topics: A potential indicator for the beginning of alt season, and how a bear market might affect the altcoin markets. For those who may not know, Bitcoin dominance is a percentage that measures Bitcoin’s share of the entire cryptocurrency market capitalization. It is not a perfect metric, but it helps to analyze the macro-market. We can observe capital flowing between alts and BTC with this chart and make some conclusions about the market’s current state.
In mid-March, we projected BTC dominance would hit a local top on April 1st. In layman’s terms, a local top on BTC dominance implies that from that point forward, altcoins would be gaining market share relative to Bitcoin. Even more simply put – Alt Season. In the chart below, we can see that BD has dropped from a high of 46% to 36% currently. Meanwhile, the total market capitalization of all altcoins has more than doubled, climbing from a low of $133 billion to greater than $280 billion.
Naturally, everyone wants to know, “Is it alt season?”. In addition to the recent doubling in altcoin market capitalization, the Buy Markets Percentage chart from Turtle BC confirms it. The metric exceeded 50% for the first time since December/January’s alt season, reaching a high of 91%. The last time these levels were observed in the market was in March 2017, when altcoins entered a solid bull market for three months.
Now that we know we are in an ‘alt season’ of sorts, the question becomes, “How long and how high will we go?” We will make those projections by analyzing patterns in BTC dominance in the past two alt cycles. Furthermore, we will examine individual alt charts for signs that the parabolic uptrend is ending.
Let’s begin by looking at the alt season that occurred in the 1st half of 2017. Altcoins began sharply gaining against BTC around 2/25/17. BTC dominance declined rapidly from 86.5% to 38% on 6/19/17. The 48.5% drop meant BTC lost about 56% of its total market share to alts, indicated below.
This is where we start to see patterns. From June until December, BTC regained half of the market share that it lost, topping out at 62%. As stated at the beginning of the article, a local top in BTC dominance is interpreted as the beginning of alt season. The new alt season commenced on 12/7/2017, and we saw BTC dominance drop a total of 30%. The fall from 62% to 32% Bitcoin dominance constituted a 48% loss of market share to altcoins.
As quickly as it came, the euphoria that permeated the market died down in mid-January. As the market saw a substantial sell-off, BTC dominance rallied from 32% to 46% on April 1st. Again, Bitcoin regained almost precisely half of the market share it lost in the prior alt season. We have been in the midst of yet another alt season, although quieter thus far than past ones, since April 1st. Is the pattern becoming clearer yet?
Each alt season, Bitcoin loses a bit less market share (by percentage) than the previous season, and it then regains about half of that loss. We theorize that this pattern will continue. A 56% drop in Spring 2017 was followed by a 48% drop in winter of 2017/2018, so we will roughly estimate that BTC loses 42% of its dominance in this cycle.
So how can we use this information? We can project a final bottom for BTC dominance.
Crunching the numbers, a 42% drop from 46% BTC dominance gives us a final target of approximately 26.7% BD. While this doesn’t estimate the length of alt season, we can hold alts and regularly monitor BD until this target is met.
Why does this pattern occur? There are a variety of factors that influence altcoin market cycles and the Bitcoin dominance metric. To begin, it’s important to note that Bitcoin dominance has been steadily declining since the first altcoin was ever created. Many misinterpret this steady decline as a sign of Bitcoin losing its impact in the market. Meanwhile, Bitcoin maximalists will argue that the figure is entirely meaningless. They claim that countless ICOs and forks are artificially increasing the supply of coins and inflating the total cryptocurrency market capitalization. Both camps make valid points.
The truth lies somewhere in the middle. Is Bitcoin losing impact? Yes, to some extent. But at the end of the day, Bitcoin still dictates the market. When Bitcoin crashes or sharply corrects, it nearly always brings the rest of the market down with it. The decline of BTC’s market share is inevitable with more coins continuously added to the mix; however, the decline in market share does not mean BTC spot at #1 in the market is threatened. The addition of hundreds of coins to the bottom of the market dilutes BTC’s dominance AND ethereum, Ripple, and others. In the graph below, the gray line marked others creates a ‘long tail effect’ seen in other industries.
More importantly, though, the pattern occurs because alts have much less liquidity than BTC. @BMBernstein notes this property in his excellent thread about altcoin cycles here. High buying or selling pressure results in much stronger price movements in altcoins, compared to Bitcoin, because of thinner order books. Recall that altcoin cycles are a means of accumulating more BTC. It is precisely altcoins’ lack of liquidity that allows this. When buyers rush in, altcoin prices explode into an unsustainable trajectory. If you play your cards right, it’s possible to 2x, 5x, or even 10x your BTC investment. By contrast, markets become overbought at the end of each alt cycle. Blow-off top signs are evident, and smart money races to get out at the highest price. High selling pressure leads to a steeper drop in alts compared to BTC, and thus BTC regains dominance. Let’s look at examples.
Here, we have charts of $XRP and $XVG during last alt season. For anybody who was around last time, you’ll probably recall the excessive hype surrounding these two projects. Both print the same pattern on their charts quite clearly, although $XVG peaked earlier in the altcoin cycle than $XRP. The last leg up is made on significantly lower volume. Meanwhile, RSI, a momentum indicator, diverges from the price, giving a bearish signal.
Hopefully, you have a better idea of what to watch for during the present altcoin cycle. We can monitor BTC dominance for signs of alt season ending. Furthermore, we can continue to check individual alt charts for signs that momentum is shifting.
In the meantime, check back with @thecryptofam on Twitter for more updates. We’ll see you on the moon!
Disclaimer: This article should not be used as an investment or financial trading advice and reflects the personal views of the author. Please conduct careful due diligence before investing in any digital asset. The author invests in digital assets and may have positions in the aforementioned cryptocurrencies.