With Bitcoin’s price clearing customs at Crypto La La Land and going past $40,000 on Jan. 7, 2020, the question on everyone’s lips is (and by everyone we mean those who sold at $19,000) — when is altcoin season starting?
The few altcoin investors who HODLed through the “crypto winter” of 2018 (which caused most altcoins to lose up to 95% of their value) have all their remaining frostbite-ridden fingers crossed.
With a so-called “sea of green” of altcoin prices starting to splash across crypto indexes more frequently, their optimism is catching on — many believe that altcoins are due for a massive jump in 2021 after a horrible past three years.
Anyone who has invested and traded in cryptocurrencies other than Bitcoin for longer than a few months will be aware that the so-called altcoin market’s performance is very closely correlated to that of Bitcoin.
Altcoins run the gamut when it comes to price correlation with BTC — sometimes they skyrocket in value with Bitcoin, sometimes their prices remain largely unaffected. Other times, in times of serious market upheaval, the value of altcoins tank twice as fast as that of Bitcoin’s. Are there any trends to discern from this?
BTC's lift on altcoins cannot be boiled down to a simple yes or no, and it’s very hard to prove even the most elementary assumptions. Bitcoin's increase in price is coupled with large trading volumes that take the spotlight away from alternative assets. This is easy to see given Bitcoin’s current 69% dominance — by market capitalization — of the entire market. With Bitcoin's recent rally to a new all-time high, the bullish momentum was expected to eventually catalyze a side-show bull run for other cryptocurrencies.
Unfortunately, as is often the case with altcoins, expectations didn’t meet reality. At least not in 2020. However the first week of 2021’s price action, that has seen many altcoins more than double in value, leaves investors to dare to dream.
BTC's 2020 Lift on Altcoins Applied to Only a Few Coins
Bitcoin's price finally broke its all-time high and the magical mark of $20,000 in late December 2020, at the time of writing closing in on $38,000. However, it was largely a lonely journey for Bitcoin last year, as while it soared, most altcoins did not. It is interesting, however, to see that the leading altcoins, such as Ethereum, Litecoin and XRP (at least until its SEC woes at one point crashed its price) also experienced strong gains versus the U.S. Dollar.
Probably the most interesting Bitcoin vs altcoin contest in 2020 was that of BTC against yearn.finance (YFI), a radically new DeFi protocol that finally delivered a so-called “flippening,” overtaking Bitcoin’s price by reaching $40,000. This was largely due to DeFi’s exponential growth and the project’s very small total supply. Bitcoin has since reclaimed its top spot, and while YFI still follows in its heels, BTC is maintaining its price lead.
For a while in 2017, many believed that Ethereum would be the first to flip Bitcoin. It never happened. Instead ETH continued to drop in value until early 2020.
Ethereum took a while to get going in 2020, finally picking up momentum in the fourth quarter thanks to its historic launch of the Beacon Chain that kickstarted the migration to the much anticipated Ethereum 2.0, and Bitcoin crossing the promised land of $20,000. Since then, Ethereum has flown past $1,000 with a skip and a jump and is currently eyeing its 2017 all-time high price of $1,400.
There can be little doubt that a very strong Bitcoin eventually lifts up its closest pretenders to the throne.
Ripple's XRP has followed a trend similar to Ethereum's. The cryptocurrency reached a staggering all-time high of $3.84 on Jan. 4, 2018, before a prolonged freefall began that took it to under 12 cents over the last year.
Buoyed by Bitcoin’s bull run and Flare Networks’ Spark token airdrop in December 2020, XRP climbed to over 70 cents on Nov. 24 before Bitcoin hit a temporary plateau. XRP's price then began to decline as the market leader continued to appreciate, finally crashing to under 25 cents under the weight of the SEC’s announcement that XRP was indeed a security. However, on Jan. 7, XRP was then again up 45%.
Bitcoin's momentum does not always reflect the dynamics of the entire market, but rather mirrors the first-mover advantage the leading digital asset enjoys.
In most cases, Bitcoin’s bullish run is not in tandem with altcoins.
Ethereum Remains the Altcoin Gatekeeper
Previous bull markets have seen Bitcoin enjoy an uptrend before altcoins join the wave. Alternative cryptocurrencies followed after Bitcoin reached an all-time high or a peak. Between this ebb and flow stands innovative Ethereum, the unofficial crypto gatekeeper, on which the majority of ERC20 crypto projects, DeFi protocols and smart contracts reside. What happens to Bitcoin and Ethereum impacts altcoins, like suckerfish on a couple of whales.
This is a growing pattern that will likely continue to be repeated. Altcoins usually pull back during a Bitcoin bull run. It is only after big brother Bitcoin has stabilized and completed its rally that an altcoin uptrend kicks in.
Some deductions have been made by market analysts over time; however, they remain speculative. The Bitcoin rally has to consolidate and Ether’s price needs to break out before altcoins can see a sizable rally.
Ether's price is important because Ethereum is one of the most trusted cryptocurrencies aside from Bitcoin, and an important weather vane of pending price action. Ethereum claims its role in the space as the most trusted altcoin thanks to it essentially pioneering both the 2017 ICO boom and 2020’s rise of the fledgling decentralized finance (DeFi) industry.
The demand for DeFi protocol tokens has been instrumental in increasing the altcoin trading volume. However, if the demand for DeFi tokens takes a nosedive, the momentum will shift in Bitcoin's favor.
Can Altcoins Lift BTC?
Short answer. Not often. Bitcoin rarely gets boosted by altcoins. When Facebook announced its Libra project in mid-2019, Bitcoin was seen as the biggest beneficiary who would see a surge in mainstream attention towards cryptocurrencies. Libra (now Diem) brought a lot of attention to the crypto market, which in turn, worked in favor of Bitcoin, who was the digital asset with the highest profile.
The majority of altcoins however, suffered big drops in value as Libra’s consortium of blue-chip partners represented established leaders in the very industries that altcoins had proclaimed they were disrupting.
Since then, Facebook's much-maligned stablecoin project has suffered from a vicious backlash from regulators, which caused it to rebrand to Diem.
It would appear that once altcoin pumps have run their course and claimed too much dominance from Bitcoin, the original cryptocurrency usually swiftly steps in to reclaim its throne.
Altcoins Shoot Themselves in the Foot
BTC's lift on altcoins — or lack of — has more to do with altcoins than Bitcoin. Bitcoin acts as the gold standard of the crypto industry. The leading digital asset is fully decentralized and liquid, available for trading on almost any crypto exchange on the planet. This breeds trust with investors.
However, the story is very different for altcoins.
While there are good altcoins on the market, some of them are not as good, and others are just a disaster waiting to happen. Most projects from the 2017 ICO boom have failed, leaving investors reeling from financial losses. It has been estimated in fact that 85% of all ICOs were indeed scams. Investors who remained in the crypto industry may have decided to consolidate in the most trusted assets. Bitcoin is the obvious choice as the flag bearer for the virtual asset industry.
Altcoins have also become synonymous with exit scams. A good example is Bitconnect, which made off with more than $3 billion in investors' money. The market may no longer be the wild west it was a few years ago, but investors are shying away from shady altcoins. This affects the broader altcoin market as investors pour their money into Bitcoin. The vote of confidence in Bitcoin is what leaves altcoins behind.
Liquidity is also a factor. Less popular altcoins suffer from insufficient market liquidity, opening it to market and price manipulation from bigger investors (whales), thus leading to severe volatility in price, as well as the unlikely prospect of a possible 51% attack.
BTC's Lift on Altcoins: Hope for the Future
The early days of the crypto market saw retail investors pump the market. They invested in all kinds of altcoins, as long as they saw the opportunity for quick and runaway profits.
With the market enduring several cycles of booms and busts, institutional players are entering the fold. They are betting big on Bitcoin and less on altcoins. This keeps the momentum in Bitcoin's favor. It will be a while before BTC can truly lift altcoins.
Ethereum, seen as the silver to Bitcoin's gold, is the hope of the altcoin market. The start of bullish momentum for Ethereum could be the start of the so-called altcoin season. With Ethereum now firing on all decentralized systems, altcoins face the mammoth task of catching up and taking back some of Bitcoin's lion's share of the market.
In the meantime, altcoin investors have to figure out a simple question: Are you a crypto suckerfish or just a plain sucker?