A Beginner’s Guide for this New Cycle

With so much going on in the cryptocurrency space on a daily basis, it can often be difficult to stay up to date or to even find reliable information. At HYCM, we work hard to provide you with useful, trusted information that’s easy to digest and can help you make educated trading decisions. Today we’re going to focus on cryptocurrency altcoins. The purpose of this article is to give you an overview of certain trends between bitcoin and the rest of the crypto market that have emerged over the years, as well as to clue you in to some of the nuances of their behaviour.

What is an altcoin?

For those who are completely new to altcoins, they are essentially any crypto token that’s not bitcoin. The name took hold in the earliest days of the cryptocurrency field when developers would fork the bitcoin code in order to create their own versions with different features. These alternatives to bitcoin came to be known as altcoins. The name has endured, despite many cryptocurrencies being built completely from scratch, for a variety of uses, with no reference to bitcoin itself.

As far as the trading of altcoins is concerned, there are certain dynamics that should be kept in mind. As you’re probably aware, Bitcoin is king of the crypto world; up until 2017, it accounted for almost 100% of the entire cryptocurrency market cap. The explosion of smart contract platforms like Ethereum, privacy coins like Zcash, and a plethora of other crypto assets, has caused Bitcoin’s dominance to drop over the years. However, today its dominance (its percentage of the total crypto market cap) tends to remain between 50% and 70%. At the height of the crypto bull market in 2017, its dominance dropped as low as 35%. In 2019, Bitcoin’s dominance reached as high as 73%, and this year it has gone from a high of around 70% to a low of around 57%.

These figures tell us two important things. Firstly, as the market evolves, other cryptocurrencies are emerging to challenge Bitcoin’s dominance. Secondly, despite more competition, Bitcoin continues to hold the overwhelming majority of cryptocurrency liquidity and, as such, cannot be ignored. Long story short, altcoins do not exist in a vacuum, and it is unwise to trade them without being aware of what Bitcoin is doing.

How do altcoin’s trade?

Another important fact to keep in mind is that altcoins, like smaller cap stocks in the traditional financial world, are more volatile than Bitcoin itself. This means that in a bull move they can rise by greater percentages than Bitcoin itself but in a sell-off, they also tend to drop further than the number one cryptocurrency. A perfect illustration of this is Ether, the Ethereum network’s native cryptocurrency. During the crypto bull market of 2017, Bitcoin rose by an astonishing 2500%. However, not everyone is aware that Ether massively outperformed Bitcoin, rising by around 12,000% in the same period. Similarly, in the bear market that followed, Bitcoin fell by around 85%, peak to trough, whereas Ether’s fall was closer to 95%.

Now, why do we refer to an altcoin bull market as taking place separately from a Bitcoin bull market? Because altcoin performance is still largely contingent on Bitcoin’s performance. At a current market cap of $344 billion, the amount of value held in Bitcoin is so large compared to other cryptos, that it can easily spill over into the rest of the market during firmly established bullish trends. Likewise, it can also soak up altcoin liquidity during uncertain times as investors retreat to the perceived safety of Bitcoin.

So, when Bitcoin is in an uptrend, altcoins will normally follow suit. When Bitcoin is in a downtrend, altcoins will also tend to fall along with it, and often fall further. But it’s not that simple. The altcoin market typically looks for Bitcoin to rise and then to maintain itself at a new higher level before traders risk their capital. Often altcoins won’t start following a bullish move in Bitcoin until it slows down, consolidates, and sets a new higher level of support.

So, not every move higher in Bitcoin is a signal of altcoin strength. The summer of 2019 provides us with a good example of this dynamic. Coming off the $3100 lows hit at the end of 2018, Bitcoin posted gains for five consecutive months, from February to June. On June 26, 2019, the price reached just shy of $14,000, a level around 29% down from its all-time highs.

The altcoin market also posted gains in this same period, closing higher for four consecutive months to set its yearly high on the same day as Bitcoin. What was the difference? This high was around 70% down from its all-time high. Meaning that if you were in altcoins, you were taking much more risk for far less reward as compared to Bitcoin.

Now, you might argue that this difference could be attributed to certain underperforming laggards in the altcoin space dragging down the average performance of the altcoin market as a whole. One of those laggards was actually Ether, the second-largest cryptocurrency by market cap. At its 2019 highs, Ether was still 74% down from its all-time highs. In other words, Bitcoin’s 2019 move failed to convince altcoin traders that a new bull market was in effect. This proved to be the case, and the entire crypto market spent the rest of the year giving up the gains it had made until June.

Not all altcoins are created equal

Another important part of this story is that the dynamics we’ve explored so far are bound to change over time. It’s important to note that as altcoins, like Ether, become more firmly established, they begin to behave more like Bitcoin. This is because they become more firmly entrenched in the minds of investors, but also because their market cap grows, meaning that they start to behave more like a large-cap rather than a penny stock. With a current market cap of $68 billion, it’s going to be almost impossible for Ether to provide the sorts of gains in this cycle that it did in 2017. That type of performance is reserved for the smaller cap coins, most of which have sub-$1 billion market caps. Ether’s status as a large-cap cryptocurrency also makes it less volatile than other altcoins.

We saw this dynamic reflected on the downside earlier this year. During the broad sell-off we witnessed in response to coronavirus, both Bitcoin and Ether dropped within reach of their 2018 lows, however, neither of them tested those lows. This wasn’t the case for the rest of the altcoin market. Many of the smaller-cap coins actually set lower-lows in March of 2020, dropping below their 2018 lows, which the market had taken to be the bottom of the bear market.

Conclusion

Why is all this important? Because, if the positive price action we’ve been seeing lately continues and leads to a prolonged bull market in all cryptocurrencies, we might expect other, lesser-known, smaller-cap coins, to rally harder than either bitcoin or ether, just like they sold off more violently during the corona crash. Also, it pays to know when you’re taking more risk than you need to, as well as when that risk may be warranted. As to the question of whether we are currently in an altcoin bull market, we really need to see bitcoin break and close above its all-time highs, as well as find support at these higher levels for the rest of the market to feel confident enough to rally higher.