When will the long-awaited altseason arrive in the cryptocurrency market?

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By TP

Key facts: For analyst Nikolai Galozi, it is time to prepare for this phenomenon. Altseasons tend to occur in the final phase of a Bitcoin uptrend. With the recent pullback in the price of Bitcoin (BTC), there is uncertainty about when the market as a whole will return to the bullish path and an altseason could occur. An altcoin season, better known by its English term, altseason, is a period in which major tokens and cryptocurrencies perform better than Bitcoin. Since the birth of various altcoins (cryptoassets other than Bitcoin), An altseason usually occurs in the second phase of a BTC bull cycle.This is due to the expansion of risk appetite, which leads investors to buy various assets on the market. The lower market capitalization of altcoins relative to bitcoin means that they have greater price volatility due to lower trading volumes. Therefore, when their demand increases, they can experience better returns, something valued by traders looking for quick profits. The current outlook is not yet close to this scenario. Although bitcoin reached a new all-time high price five months ago of $73,700 (USD), it has since moved sideways in a range below, as seen below. Thus, in general, the main altcoins have not surpassed their records recorded in the previous bullish cycle of 2020-2021.

Bitcoin price over the past six months. Source: TradingView. According to German financial consultant Nikolai Galozi, Bitcoin has entered a typical mid-cycle correction that investors see as key. He points out that the mania of these trends has historically occurred the year after the halving, an event that halves the issuance of BTC every four years. “This fits well with the probabilities of a prolonged consolidation phase throughout 2024 (the year of the halving) and a true bull run in 2025 (the following year),” he says. Therefore, he considers that the next 4-6 months will be a good time to rebuild and/or restructure the allocation in crypto assets. Normally, hodlers (long-term investors) tend to sell on rallies and accumulate during bear markets. “The same is happening in this mid-cycle correction,” he noted. Instead, demand from new buyers always skyrockets during times of strong rise. “If the mid-cycle correction continues, most hodlers would start accumulating, according to historical behavior,” he mentions. He thus sees this dynamic as the precursor to a possible mania phase in 2025, driven by macroeconomic conditions.

“Altcoins have significantly underperformed over the past two years, but potentially looser monetary policy in the year following the halving is the perfect breeding ground for speculation and short-term retail interest” Nikolai Galozi, investor and financial consultant.

According to the specialist's view, The biggest influence on cryptoasset prices comes from global monetary policy. “Interest rates have been restrictive for a long time and the economy is beginning to show weakness,” he stressed. With the slowdown in the labor market in the United States, there are fears that a recession (decrease in economic activities) will break out. This occurs while the economic power has maintained interest rates for more than a year at 5.5%, their highest in two decades. The Federal Reserve (Fed), the body in charge of US monetary policy, expects to lower rates in the remainder of 2024. Therefore, the market's eyes are on its next decision on the matter, scheduled for September. According to Galozi, this measure will have a positive impact, but not immediately. The financial consultant explained that Lower interest rates are the main sign of a weakening economy. He notes that this leads to an asset price correction in principle. “It is only after the asset price correction that looser monetary conditions begin to drive markets to new highs and crypto assets begin to outperform again,” he clarified. This can be seen in the following chart, which shows the price of bitcoin and interest rates in the United States.

The price of Bitcoin is shown in orange and the interest rates in the United States are shown in blue. Source: Seeking Alpha.

Cryptocurrency trading carries risks to consider

Galozi points out that in times of monetary tightening, investors tend to flock to larger, less risky assets. “In the crypto space, this is the case with Bitcoin because it has by far the most decentralized, time-tested and secure network,” he detailed. In contrast, Speculation tends to soar when monetary policy begins to ease significantly. In such a context, he mentions that investors are seen flocking to smaller, riskier, less decentralized and insecure altcoins. This is when an altseason occurs and bitcoin loses its market capitalization dominance. Altseason moments are relatively short, given that, in the absence of bullish fundamentals, strong profit-taking occurs. This leads to stratospheric rises, followed by falls that leave many investors at a loss. This is why it is a market with high risks to manage. “Many altcoins disappear forever in the depths of the bear market,” warns Galozi. An example of this, for the moment, is the memecoin dogecoin (DOGE) that stood out in the 2021 bull cycle by perceiving an increase of more than 10,000% and is currently trading 85% below.

DOGE price over the past few years. Source: TradingView. Bitcoin, on the other hand, has the foundations to continue to rise in the long term. “I think the growing demand for a permissionless, decentralized, immutable, and deflationary digital asset in a world of centralized monetary debasement seems inevitable,” the financier commented on the matter. Understanding this nature of the market, for the consultant, It makes more sense to maintain a strong core position in bitcoin at all times in the crypto portfolio, and only diversify a portion of it into altcoins when BTC dominance is near its peak. According to his outlook, in the next two months, bitcoin's market cap dominance (shown below) could peak due to the macroeconomic situation. Until then, he believes it's time to re-accumulate BTC and Ethereum's cryptocurrency, ether. (ETH), which is the largest altcoin by market cap.

The price of Bitcoin is shown in orange, and the dominance of its market capitalization in the cryptoasset market is shown in blue. Source: Seeking Alpha.

There are conflicting views on how the cryptocurrency market will continue

Similar to Galozi's thinking, investment firm Pantera Capital argues that The market is about to enter the second phase of the Bitcoin bull cyclein which an altseason is forming. He bases this on the weakness that altcoins are showing against BTC, which has risen by 250% since its bearish bottom in 2022, despite the recent setback. He sees this scenario motivated by the probability that Donald Trump, who has identified himself as a defender of bitcoin and cryptocurrencies, will win the US elections. In addition, he adds that the market is motivated by the launch of Ethereum exchange-traded funds (ETFs), which opens the door for other altcoins to be approved.

DonaldTrump-United States-Nashville-Bitcoin

Trump said he will keep 100% of all bitcoin that the US government currently holds in custody. Source: Bitcoin 2024. For Pantera Capital, it is key to keep in mind in this scenario that not every altcoin can rise in an altseason. “It is important that as investors we do not fall into that same trap and paint everything in broad strokes,” he distinguishes. Meanwhile, from a pessimistic view, Not everyone agrees that macroeconomic conditions will favor the market.. According to Richard Durant, head of asset manager Narweena, the carry trade situation in the Japanese yen (JPY), the currency, could continue to put pressure on asset prices. The carry trade involves borrowing money at a low interest rate in Japan, converting it to US dollars (USD) and investing where better returns can be achieved. Such activity was attractive to investors while low interest rates in the Asian country and high rates in the United States were hurting the value of the yen. With the recent rate hike in Japan, while the United States is expected to start lowering them, the value of the yen has reversed. According to Durant, this situation, which has led leveraged investors to exit the markets, will continue in the coming months, as the risk of recession and geopolitical tensions continue. “I will only become optimistic about bitcoin’s prospects if a recession causes a sharp drop in prices and central banks reduce interest rates and inject liquidity into the system, creating a more favorable environment for speculative assets,” Durant warned. Therefore, in your case, you consider it prudent to be cautious in this context.