Summary:
Bitcoin has led initial market surges in previous cycles, boosting investor confidence.
Historically, altcoins significantly outperform Bitcoin in the latter half of market cycles, hinting at future potential.
The crypto market is highly influenced by global net liquidity conditions, with a favorable outlook for Fed rate cuts.
Political endorsements related to crypto may greatly influence market dynamics during the U.S. election.
Current cycle dynamics could differ due to mainstream adoption and increased competition among altcoins.
Understanding Crypto Market Cycles
Although crypto history is relatively short, with Bitcoin celebrating its 15th anniversary this year, we have already witnessed three significant market cycles: 2011-2013, 2015-2017, and 2019-2021. This rapid cycle time is attributed to the 24/7 trading nature of the crypto market, which operates about five times more than traditional equity markets.
Bitcoin's Role in Market Surges
In both the 2015-2017 and 2019-2021 cycles, Bitcoin led the initial market surge, building confidence among investors and paving the way for a broader rally. As optimism grew, capital shifted towards altcoins, driving a widespread market rally. Notably, altcoins' market cap peaks often coincided with a bottom in Bitcoin's market cap dominance, indicating a rotation of capital from Bitcoin to altcoins. Currently, Bitcoin's dominance is on the rise from the post-FTX low, suggesting further potential for Bitcoin before altcoins catch up.
Altcoins Outperforming in Later Cycles
Historically, altcoins have significantly outperformed Bitcoin in the latter half of the market cycles. For instance, during the second half of the 2015-2017 cycle, altcoins returned 344x compared to Bitcoin's 26x. Likewise, in the 2019-2021 cycle, altcoins returned 16x, while Bitcoin achieved 5x. As we are now approximately halfway through the current cycle post-FTX, this trend hints at potential altcoin outperformance in the upcoming months.
The Macro Economic Landscape
The crypto market is closely tied to global net liquidity conditions. Previous cycles have seen an increase in global liquidity by 30-50%, which has been a driving factor behind market movements. The recent selloff in Q2 was influenced by tighter liquidity conditions; however, with inflation and growth slowing, the prospect for a Federal Reserve rate cut appears favorable. Currently, the market anticipates a 95% chance of a rate cut in September, a significant increase from 50% at the beginning of Q3.
Influence of Political Events
Crypto policy is becoming a central theme in the U.S. election, with endorsements from political figures potentially swaying investor sentiment. Historical patterns show that both U.S. elections and Bitcoin halving events have coincided with significant rallies in the past.
Could This Time Be Different?
While historical patterns provide valuable insights, the current cycle could diverge from past trends. The mainstream adoption of Bitcoin and Ethereum through ETFs and record inflows from retail and institutional investors signify a shift. However, competition among altcoins has intensified, with many new projects facing challenges due to limited circulating supply from airdrops, which could lead to future dilution. Only ecosystems with robust technology and the capability to attract builders and users are likely to thrive in this cycle.
About the Author
Kelly Ye is a portfolio manager and head of research at Decentral Park Capital. Follow her insights on Twitter at @kelly_cfa.
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