Understanding the Cryptocurrency Cycle

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Cryptocurrencies are becoming more and more important in the world of financial markets. The preserve of financial technophiles, they are gradually becoming more democratic vis-à-vis institutional investors. Their arrival will probably accelerate the financialization of cryptocurrencies, like what happened to commodities from the 2000s. This will only strengthen their place as an asset class in its own right. No one will dispute their usefulness in a wallet anymore. From Bitcoin to altcoins, let’s now analyze the different phases of the cryptocurrency cycle so you can profit.

Phase 1: Bitcoin Leads the Cryptocurrency Market

Phase 1 is marked by the supremacy of Bitcoin (BTC) over altcoins. Not just because of its top spot by market capitalization, but because it usually drives the entire cryptocurrency market on big moves. If we conflate a famous stock market proverb, keep in mind that “When Bitcoin Coughs, Altcoins Catch Colds”.

Bitcoin bear market in 2014 and 2018

Of the four phases that make up the cryptocurrency cycle, phase 1 is the one that lasts the longest. Which is a little more logical, because it comes after a violent period of consolidation. For example, the bear markets of 2014 and 2018 took a long time to unravel. This translates into an excessive wait-and-see attitude among investors, many of whom invested at the worst moment of the cycle. On the other hand, savvy investors see it as an opportunity to accumulate cheaply to take advantage of a future bull market.

During this phase n°1, the allocation of a cryptocurrency portfolio starts with Bitcoin. Why ? Because it’s the dominant digital currency 75% of the time. Many specialists compare it to gold by their common intrinsic characteristics.

The other reasons for favoring Bitcoin are specific. First of all, it has the longest history of listing cryptocurrencies, more than 11 years of existence. This allows investors to have a better view of past cycles, assess potential return on investment and measure risk. Second, the fact that its creator Satoshi Nakamoto has distanced himself from the project since late 2010 makes Bitcoin less dependent on a strong personality. Consequently, the risk of conflicts of interest is virtually nil. Third, Bitcoin is the most decentralized digital currency due to wide competition in mining.

Phase 2: Ethereum roars again

During phase 1, Ethereum (ETH) also does well, but not to the point of overshadowing Bitcoin. It alternates back and forth as the first digital currency is firmly entrenched in its uptrend. As investors have a satisfying bitcoin allocation, that’s when Ethereum takes off.

eth/btc ratio
Evolution of the ETH/BTC ratio

The second digital currency superforms Bitcoin ahead of its cycle. Throughout the second phase, the relative strength in favor of ETH is only growing as evidenced by the rise in the ETH/BTC ratio over the past few quarters.

In addition to Ethereum coming off in a good way, we are seeing investment flows gradually entering large cap altcoins. It sometimes happens that some of them are already on historic records.

Phase 3: The renewed interest in large cap altcoins

Phase 3 is very interesting to follow from an educational point of view. It allows you to discover projects with high added value on the cryptocurrency market such as DeFi, gaming, the metaverse, logistics, traceability, etc. Like what you need to diversify your crypto portfolio to better distribute the risk.

During this phase, Ethereum completely breaks away from Bitcoin in terms of performance. This supports an upward acceleration of large cap altcoins with strong fundamentals like Cardano (ADA), Solana (SOL), Polygon (MATIC), Polkadot (DOT), Avalanche (AVAX), and Terra (LUNA).

Given that the financial press often gives pride of place to Bitcoin and Ethereum, it is not surprising that this market news on cryptocurrencies is not relayed in droves. Not because it is a will on their part, but it is explained by the weak historical data of quotation of the altcoins quoted in the previous paragraph.

Phase 4: The altcoin season

Phase 4 is the shortest in the cryptocurrency cycle. It refers to the “Altseason”, the season of altcoins. In the continuity of phase n°3, the large caps of altcoins are chaining new records and superforming Bitcoin and Ethereum. And at the same time, they will be followed by a surge in mid, small and micro cap altcoins.

The fact that all cryptocurrencies rise with each other without any consolidation, promotes the phenomenon of FOMO (Fear of missing out). And at some point in phase 4, we are moving from an optimistic market to a euphoric market. This is explained by an excessive rise in cryptocurrencies with regard to their intrinsic fundamentals. Investors are excited at the prospect of making potentially explosive gains in a short space of time.

Euphoria takes over the fundamental reality. Records are linked on Bitcoin, Ethereum and altcoins. No one takes any bad news about them into account. But as phase #4 matures, we see a distribution phase where the strong hands gradually take their profits and push the hot potato back to record low-handed levels before the onset of a bear market brews.

Key points to remember

Just like what happens with other risky asset classes, cryptocurrencies are not immune to the notion of cycle and market psychology. Phase 1 requires more patience. More savvy investors will prefer to accumulate Bitcoin. Phase 4 bears witness to the ambient euphoria of the market and ends with the end of the Bitcoin bull market when the number of participants is at its peak.

bitcoin bear market
Declining dominance of Bitcoin over altcoins

Although Bitcoin remains the leading market for cryptocurrencies, it is clear that its dominance is contested. This seems normal with the emergence of altcoins to which are added projects that could upset certain sectors of activity. That being said, put aside the comparisons. Bitcoin is a reserve asset like gold even if it remains to be demonstrated in the near or distant future. And in the event of a bear market, Satoshi Nakamoto’s digital currency would have a good chance of regaining its leadership and once again dictating its law on the cryptocurrency market.

Sovanna Sek

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