What is Altcoin Season, and Why has Altcoin Underperformed this Cycle?

Altcoin season, often referred to as "altseason," denotes a period when alternative cryptocurrencies, or altcoins, experience a surge in price and market dominance relative to Bitcoin.

What are Altcoins?

Altcoins are any cryptocurrencies other than Bitcoin. While Bitcoin remains the most well-known and widely adopted cryptocurrency, the market hosts thousands of other digital currencies. These range from established ones like Ethereum (ETH), Ripple (XRP), and Cardano (ADA), to newer protocol tokens such as Arbitum (ARB), LayerZero (ZRO). Each altcoin typically aims to serve a unique function within the blockchain ecosystem.

The Cyclical Nature of the Market

The cryptocurrency market is inherently cyclical, characterized by alternating periods of Bitcoin dominance and altcoin growth. Bitcoin dominance is a metric that measures Bitcoin's market capitalization relative to the total market capitalization of all cryptocurrencies. When this dominance is high, it indicates that Bitcoin is outperforming most altcoins. Conversely, a decline in Bitcoin dominance often signals the onset of an altcoin season, where altcoins start to outperform Bitcoin.

Related Reading: What is Bitcoin Dominance?

Why Does Altcoin Season Occur?

Altcoin season occurs due to several interrelated factors:

• Search for Higher Returns: As Bitcoin's price stabilizes or grows at a slower rate, investors often seek higher returns in the more volatile altcoin market.
• Innovation and Utility: Many altcoins offer unique features and utilities that Bitcoin does not. For instance, Ethereum's smart contract functionality has driven significant interest and investment.
• Market Maturity and Diversification: As the cryptocurrency market matures, investors become more sophisticated and seek to diversify their holdings across a broader range of assets.
• Speculation and Hype: The cryptocurrency market is also driven by speculation. News, rumors, and hype around specific altcoins can lead to rapid price increases.

Altcoin Underperformed in 2024

Bitcoin has already reached the all-time high price early this year, and is now consolidating at $60K to $70K range. In contrast, despite the occasional hype and short-lived rallies, the altcoin market has not seen a significant recovery. This can be contributed to several reasons.

Bitcoin Dominance and Market Dynamics

Bitcoin remains the king of cryptocurrencies, and its dominance in the market has only strengthened over the past year. Currently, Bitcoin's market dominance hovers between 51% and 56%, a far cry from the dramatic drops seen in previous cycles. For instance, during the 2017-2018 cycle, Bitcoin's dominance fell from 86% to 38%, and from 70% to 38% in the 2020-2021 rally. This persistent dominance of Bitcoin limits the flow of capital into altcoins, thereby stalling their recovery.

Economic Conditions

The broader economic environment plays a significant role in the performance of speculative assets like cryptocurrencies. Currently, the global economic landscape is challenging, with high interest rates and a widespread cost of living crisis. These conditions make it difficult for individuals to invest discretionary income into high-risk assets such as altcoins.

The macroeconomic factors, particularly interest rates, are pivotal in determining the flow of capital into speculative assets. Current projections suggest that a potential pivot in interest rate policy by the Federal Reserve might not occur until September at the earliest. Even then, the lag effect of monetary policy changes means that it could take several months for any reduction in rates to positively impact disposable incomes and investment sentiment.

Impact of Bitcoin and Ethereum ETFs

The introduction of Bitcoin ETFs has not provided the boost to the altcoin market that many had hoped for. These ETFs attract a different class of investors who prefer the security and familiarity of regulated financial products. As a result, these investors are less likely to transition from Bitcoin ETFs to altcoins. Additionally, the logistics of moving from ETF investments to direct altcoin purchases are cumbersome, further limiting the potential for altcoin market growth.

Will Altcoin Season ever Come this cycle?

While the current state of the altcoin market may seem bleak, the conditions necessary for a rebound are gradually taking shape. Although the progress may be slow, it is widely expected that the US Federal Reserve will start to decrease interest rates later this year. Additionally, many other central banks have already begun to lower their policy rates. Consequently, global monetary conditions are expected to loosen either later this year or early next year. Loose financial conditions generally favor risk assets as a whole, including altcoins.

Retail interest is another critical factor to consider. While Bitcoin has been a primary focus for institutional investors since the start of this year, there has not been a significant increase in interest from retail investors, unlike the last crypto bull cycle in 2021. This lack of retail enthusiasm can be attributed to the reasons outlined in the previous section. However, if Bitcoin can maintain its upward trend and break key levels, such as $100,000, it will undoubtedly attract attention from non-crypto individuals. Such milestones would likely make headlines, stimulating retail interest and investment in the broader crypto market, including altcoins.

Predicting the exact timing of an altcoin market recovery is complex. However, monitoring macroeconomic conditions and retail interest will be crucial. Staying informed and adaptable will enable investors to capitalize on opportunities as they arise. The interplay of easing financial conditions and renewed retail enthusiasm could set the stage for the next altcoin season, but patience and vigilance will be essential.