Market dynamics are completely different in crypto. Many try to compare price action and market cycles to traditional markets, like stocks and gold. This is not a good idea for several reasons which we will not delve into.
What we want to look at today are the reasons why some of the smaller altcoins experience a high level of volatility when Bitcoin remains rather stable. We will also talk about the reasons why the altcoin market “bleeds” each time Bitcoin makes an upward move. After reading this post, you should have a better idea of proper timing when it comes to altcoin investments and knowing when to buy Bitcoin instead.
The relationship between Bitcoin and altcoins
Before delving into the specifics, we should give a brief introduction of the similarities and differences between Bitcoin and the different altcoins. This will give us a better foundation as we dive into specifics later on.
- The most popular cryptocurrency
- The only fully decentralized cryptocurrency
- Maintains the majority of market share (currently 58% market dominance)
- Is the final investment goal of most swing and position traders
- Less likely to experience large price spikes
- Very versatile. Some gain their reputation from their fundamentals while others are simply growing based on hype
- Are not fully decentralized since their founders hold the majority of the coins
- Have a small market cap that can be easily manipulated
- Are mostly a means to an end – a mid-way to obtain more BTC down the road
- More likely to experience large price spikes
Overall, one could see Bitcoin as a less risky and more certain investment option, while altcoins (at least most of them) belong in the gambling category. The latest is very risky, especially when their market cap is low.
Why does the price of altcoins go down when Bitcoin goes up?
This is very easy to answer when one looks at the overall market sentiment. Since the goal of most traders is to increase their Bitcoin positions, there is no need to remain in altcoin positions if their main coin is pumping. Here’s how the process looks like:
- Traders have small positions in many different altcoins.
- Bitcoin starts to make a move towards the upside.
- Suddenly, the altcoin positions of traders lose their (BTC) value.
- In an attempt to avoid further losses, traders move their funds into Bitcoin to benefit from the uptrend.
- Due to this, a large part of the market gets out of altcoins (decrease in demand) and into Bitcoin (increase in demand).
- This results in an upward price momentum for Bitcoin and a somewhat large price drop for altcoins.
Overall, it is important to remember that there are three large categories of coins where you can store value in. Those are:
- Bitcoin (BTC)
- Altcoins (most other cryptocurrencies)
- Stablecoins (cryptocurrencies pegged to FIAT currencies)
Most people will move into Bitcoin when the market goes up and into Stablecoins when the market goes sideways. In both options, altcoins tend to suffer. On the other hand, when the market is relatively stable, and more traders buy altcoins positions (causing them to increase in value), we have what is known as an “altcoin season”.
How to best predict an “altcoin season”
Altcoin seasons are few and far in-between. They usually occur during a bull market and last for a short amount of time. During this time, however, large profit gains can be made. From our experience, an altcoin season will occur when 1 or more of the options bellow occur simultaneously with bull market conditions that have a positive outlook:
- Hype and positive rumors for a category of altcoins (a.k.a. DeFi coins)
- (User-generated) positive media coverage and announcements of coins
- Strong fundamentals and which further fuel the hype.
How to maximize your profit potential during an altcoin season
When participating in crypto markets, there is a high level of risk. To minimize your risk exposure, make sure to:
- Take profits when your coin hits its desired price points (you will need to a realistic target beforehand).
- Set a stop-loss to avoid losing more value than your emotions can logically process.
- Always trade with BTC pairs, as the goal is to increase your Bitcoin position down the road. USD growth is also important, but if Bitcoin grows just as fast, you would have gotten the same results without taking a risk.
- Invest in coins with strong fundamentals, partnerships, and a well-known team. It might also be a good idea to search for gems that are not yet listed in very popular exchanges like Binance or Coinbase.
What to expect from the future
Since the cryptocurrency markets are unpredictable, our expectations are not certain – they are simply based on our experience with the growth of this industry.
As Bitcoin keeps increasing in popularity and more people start using it as a store of value, we expect to see the coin become less volatile and “safer” for the mainstream public. Simultaneously, there will be stricter regulations surrounding altcoins and only the best ones will be able to get a good exchange listing – this may not be true for projects that list their coin on decentralized exchanges and implement strong marketing campaigns.
Furthermore, we expect exchanges to create better analytics tools to observe the market and make better decisions when it comes to altcoin investing. This should help traders minimize their losses and eliminate any potential scamming attempt on popular trading platforms.
You should now have a better understanding of the tendencies in the crypto market. After reading the above, you should be able to understand when the right opportunity arises and invest in altcoins responsibly. From this point onwards, the responsibility lies with you.
Altcoin trading is risky but the rewards can make it worth it.
Keep in mind that all the information presented in this article is based on our own personal experience and does not constitute financial advice. It should simply be treated as educational material that can improve your decision-making process.
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