Can Altcoin Season Be Forecasted?

Since its inception in 2009, Bitcoin has predominantly reigned over the cryptocurrency market. It has evolved into a class of financial assets, boasting a daily trading volume of several billion dollars.

In that time, alternative coins have emerged and gained popularity, gradually chipping away at Bitcoin's share of the overall market capitalization. This trend was most evident during the bull market of 2021-2022, when numerous coins and tokens experienced price surges of hundreds of percentage points. Although Bitcoin also displayed positive momentum during this period, its returns were comparatively lower, resulting in a decline in its dominance.

We have previously discussed the concept of altseason in one of our articles. Let us now attempt to evaluate the factors that might indicate a potential shift of funds from Bitcoin to other digital assets.

Traditionally, markets are viewed through the lens of bullish or bearish trends. In reality, they move in long-term periods known as cycles, characterized by four phases:

Though this model lacks a fixed timeline, its pattern remains constant. Identifying these patterns can help investors enter the market during the accumulation phase and enhance their long-term profit potential.

Market cycles are primarily driven by market psychology, such as fear, greed, and cognitive biases. These fluctuations result from the inflow and outflow of money in the market. It is essential to understand that standard market fluctuations affect investors, who in turn amplify these oscillations further. Even the most stoic traders rarely adhere to objective and stable positions. When markets rise, they exhibit high levels of FOMO, risk tolerance, and herd mentality. 

Bitcoin dominance is a key indicator used by investors to help determine where we are in the market cycle and subsequently plan entry and exit points. 

This percentage value is calculated as follows: Bitcoin market capitalization / total market capitalization of all digital assets * 100.

At the time of writing, the total market capitalization of all cryptocurrencies is $1.225 trillion, with Bitcoin's market capitalization at $589.06 billion. This means that Bitcoin's dominance currently stands at 48.79%. Consequently, we are still in the accumulation phase, and until this figure exceeds 55%, it is not advisable to seek inexpensive assets for diversification.

By tracking the Bitcoin dominance index, investors can gain insight into market trends and identify potential opportunities. The same applies to Bitcoin dominance cycles as it does to market fluctuation patterns: when Bitcoin enters a sideways cycle experiencing a recession, "younger" cryptocurrencies emerge.

Using this metric, one can determine when funds are just beginning to flow from the oldest cryptocurrency to trading pairs with lower market capitalizations. This allows for rapid portfolio diversification and timely entry into the accelerating rocket of altseason.

In the previous altcoin season, new trends emerged, such as the DeFi boom, NFTs, and the hype surrounding the metaverse. Additionally, it was a veritable Christmas for traders as prices of lesser-known coins soared rapidly.

It is not unlikely that when we enter this cycle again, many secondary projects will pique the interest of investors seeking intriguing investment targets. During these periods, traders often swap BTC for altcoins (instead of fiat or stablecoins) to capitalize on the overall market movement.

While the coins and tokens may vary, altcoin season is always characterized by a significant decline in Bitcoin dominance index. During the 2021 "younger cryptocurrencies" dominance period, it dropped below 40%. At that time, profits from trading BTC paired with stablecoins had already been realized, and investors diversified their portfolios en masse, allocating funds to alternative income sources.

BTC has a long way to go before reaching its previous record highs. However, investors who purchased at last year's lows can anticipate profits and diversification into promising assets with low market capitalization, of which there are more than enough in the market currently.