Our Outlook on the Altcoin Market

The altcoin market has lagged over the past two years, primarily due to the spotlight on Bitcoin following the launch of the Exchange-Traded Funds (ETFs). These ETFs have marked a pivotal moment in institutional adoption, providing a regulated and familiar way for institutions to access Bitcoin through their trusted brokers. This development eliminated the need for complex exchange setups, driving significant capital inflows into Bitcoin and boosting its dominance. As a result, Bitcoin's dominance has been steadily climbing since hitting its low in 2022.

What Is BTC Dominance?

The BTC Dominance Chart measures Bitcoin's market capitalization as a percentage of the total digital assets market capitalization. It serves as a barometer for the flow of capital between Bitcoin and altcoins.

• High BTC dominance: Indicates market phases where Bitcoin outperforms altcoins, often during risk aversion or macroeconomic uncertainty.
• Declining BTC dominance: Suggests a shift in capital toward altcoins, signaling increased risk appetite among investors.

For example, in early 2021, Bitcoin dominance began to decline after its peak, leading to an altcoin season where assets like Ethereum and Solana significantly outperformed.

The Halving and Its Impact on Market Cycles

Bitcoin's halving event, occurring approximately every four years, is a significant catalyst for market movements. The halving reduces Bitcoin’s issuance rate, creating a supply shock that often kickstarts a bull market. Historically, Bitcoin leads the initial rally following a halving, with altcoin outperformance emerging later.

Key Patterns Following the Halving:

1. Bitcoin Leads the Rally: Post-halving, Bitcoin captures the majority of capital inflows due to its established dominance and liquidity. This is reflected in a rising BTC dominance chart.
2. Altcoin Outperformance Emerges: As Bitcoin stabilizes or consolidates, investors rotate profits into altcoins. This “altcoin season” typically occurs in the year after the halving, characterized by explosive altcoin growth.

For instance, After the 2020 halving, Bitcoin rallied through late 2020, but in 2021, altcoins like Ethereum (+400%) and Solana (+1,000%) dominated the market.

Market Realized Value Net Capital Change Breakdown

This chart illustrates the aggregate 30-day Net Position Change for the largest and most influential assets in the digital asset market. Net capital inflows occur either through increases in the Realized Cap for major assets like BTC and ETH or through growth in stablecoin supplies, including USDT, USDC, and BUSD.

For major network assets, the Realized Cap provides a more accurate representation of net capital inflow or outflow. This metric values each coin at its last transacted price, accounting for its relative liquidity while filtering out speculative, off-chain trading activities.

Traces are shown for:

Orange = BTC Net Capital Change (USD)
Blue = ETH Net Capital Change (USD)
Green = Stablecoins Capital Change (USD)

In each cycle, we observe consistent capital rotation between major network assets and stablecoins. This pattern highlights the market’s cyclical nature where net capital inflows typically begin with Bitcoin before transitioning to altcoins. We expect no deviation from this behavior during the current cycle, making these metrics crucial indicators for anticipating shifts in market dynamics.

Underperformance of the ETH/BTC Chart

Over the past two years, Ethereum has consistently underperformed within the digital assets market, as illustrated by the prolonged downtrend in the ETH/BTC ratio shown below. This chart reflects the broader trend of capital favoring Bitcoin during periods of rising dominance. When this chart begins to signal a trend reversal, it will likely indicate the onset of altseason, marking a shift in market sentiment and liquidity flows toward altcoins.

Why Is Diversification Still Important?

      1. Mitigating Risk

• Relying solely on Bitcoin can expose us to concentrated risk, especially during unforeseen market downturns or Bitcoin-specific events.
• A diversified portfolio spreads risk across multiple assets, reducing the impact of underperformance from any single asset.

      2. Capturing Long-Term Opportunities:

• While Bitcoin leads during dominance rallies, altcoins historically outperform in subsequent cycles, especially in the year following a Bitcoin halving.
• Emerging narratives and sectors, such as Decentralized Finance (DeFi), Artificial Intelligence (AI), and Real World Assets (RWA), offer growth potential that Bitcoin alone cannot provide.

      3. Hedging Against Market Shifts:

• Markets are cyclical, and dominance shifts over time. A diversified portfolio ensures readiness to benefit when capital flows rotate out of Bitcoin and into altcoins.
• For example, during past altcoin seasons, projects like Avalanche and Axie Infinity outperformed Bitcoin following periods of high dominance.

      4. Diversification Aligns with Market Cycles:

• While outperforming Bitcoin during its dominance rally is challenging, diversification prepares us for the inevitable transition to altcoin outperformance. This transition is driven by profit rotation and broader market participation.

Our Thoughts Right Now

Bitcoin dominance continues to trend higher, and this process is unfolding over a longer period than we initially anticipated. However, based on the data, the market is progressing exactly as expected.

We foresee one final liquidity event where Bitcoin is likely to draw capital from the altcoin market. This event, which we anticipate occurring within the next month, is likely to be driven by:

• Increased institutional adoption via ETFs.
• A growing macroeconomic preference for Bitcoin as a "safe haven" asset.

We are monitoring key indicators like BTC dominance levels, ETH/BTC ratio movements, and shifts in stablecoin supplies to identify potential rotation points and capitalize on the transition to altcoins.

Conclusion

The rise in Bitcoin dominance underscores the cyclical nature of the digital assets market. While Bitcoin leads during specific phases, diversification ensures resilience and positions portfolios for long-term growth, particularly as markets transition into altcoin outperformance. By understanding these cycles and maintaining a strategic approach, we navigate market dynamics with confidence and prepare for the opportunities that lie ahead.