Crypto Basics Crypto Metrics

Bitcoin and Altcoin Market Cycles: Length + Psychology

If you want to make better decisions about allocating your crypto portfolio you need to know how Bitcoin – Altcoin market cycles work. Traders stand to make a killing if they understand the mechanics of market cycles, so in this article, we are going to take you through the basics.

What is a market cycle?

When you look at the BTC price chart, you’ll notice a consistent pattern emerges: price trends upwards in a parabolic curve; then, it bounces back after a downtrend; finally, another parabolic upswing occurs. These phases repeat themselves, which is why they’re referred to as a market cycle. You can observe this pattern of changes to Bitcoin’s price since the dawn of the crypto market.

BTC/USD Historical price Index from TradingView, 1M candlesticks, log scale

Why is a market cycle important?

If you can predict market movements, you’ll have a better sense of the best time to buy or sell assets. For instance, as you can see from the above graph it can be a good idea to buy during a downtrend before the curve swings upwards.

The price of Bitcoin can also tell you what might happen to the rest of the cryptomarket: because of Bitcoin’s high market dominance the price of BTC has a strong correlation with the price of Altcoins. This means that when BTC drops in price, there is a strong possibility altcoins will also decrease in value.

For those unfamiliar with the term ‘dominance,’ Bitcoin’s dominance is the ratio of its capitalization compared to the whole crypto market. If more than half of the value in digital assets is concentrated in Bitcoin then its price will affect other coins.

BTCETHDOT XRPADALTCBCHLINKXLM
BTC1.000.870.760.740.920.900.690.800.79
Correlation between Bitcoin and some of the top 50 Altcoins.  Data from 31 Dec 2020 to 9 Apr 2021

Another pattern to watch out for is investor behaviour. Bitcoin and Altcoin cycles alternate between periods of time where one returns more gains than the other as a result of the following behaviour pattern. First, investors buy BTC with fiat (government-issued currency), then they buy altcoins to multiply their gains, after that they buy BTC again to reduce risk, and the cycle finishes when they buy fiat with BTC. This pattern is called Crypto Money Flow Cycle (CMFC) and it leads to the following market cycle phases.

Market cycle phases

  • Phase 1:  the parabolic growth

When the price is at the bottom after a bearish market, investors start to buy a lot of BTC because there is tons of liquidity available. After that, altcoin holders start to notice that BTC rises, so they sell their positions to buy Bitcoin.

  • Phase 2: Altcoin’s cycle begins

After the first boom of BTC price, most altcoins get cheaper and some people that seek adventure start to buy them, but just a few coins outperform BTC.  

  • Phase 3: Hype still going

When it looks as though Bitcoin is going to the moon, investors who were left behind want to ride the wave, so they start to buy tokens that haven’t explode yet regardless of the project. The majority of tokens begin to rise.

  • Phase 4: Time to harvest

Everybody starts to sell every coin in their possession and the price falls to a bottom, following a bear market until phase 1 comes again.

Altcoin Cycle

So how do you know when to move your money from Bitcoin to Altcoins?

The easiest way to determine if we’re going to the moon with altcoins is by comparing the performance of the top 50 Altcoins on the market and comparing them to Bitcoin. For instance, last month Bitcoin was beaten by 40 of the top 50 Altcoins, so the indicator is as follows:

Indicator = No. Altcoins outperformed BTC / No. Altcoins compared = 40/50 = 0.8

In other words, Bitcoin was beaten by 80% of the top 50 Altcoins last month, so it was an Altcoin month. This indicator goes from 0 to 1, so an Altcoin cycle begins when the value of the indicator reaches 0.5, and a Bitcoin cycle occurs below 0.5. A strong Altcoin cycle is above 0.75, and a strong Bitcoin cycle is below 0.25. You can repeat the calculation across different timeframes (a day, a week, a season (90 days), a year, etc) to gain different perspectives on the market.

Closing thoughts

The Bitcoin and Altcoin market cycles allow you to determine whether it is better to buy or sell cryptocurrency and is essential for making decisions about how to allocate your portfolio. In other words, it’s definitely worth spending the time to learn more about market cycles.

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