Markets
Anatomy of a Cryptocurrency Bull Market
Although the history of cryptocurrencies is short, with Bitcoin celebrating its 15th birthday this year, we have already experienced three major cycles: 2011-2013, 2015-2017, and 2019-2021. The short cycle length is not surprising, given that the cryptocurrency market is active 24/7, about five times longer than the stock market. The 2011-2013 cycle was predominantly BTC, as ETH was launched in 2015. Analyzing the last two cycles reveals patterns that help us understand the anatomy of a cryptocurrency bull market. With the market heating up for the US elections and improved liquidity prospects, history could be made again.
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BTC Leads Altcoins in Rally
In both the 2015-2017 and 2019-2021 cycles, Bitcoin initially led the market rally, building confidence and setting the stage for a broader rally. As investor optimism increased, capital flowed into altcoins, resulting in a broad-based market rally. Altcoin market cap peaks often coincided with BTC’s market cap dominance trough, indicating a rotation of capital from BTC into altcoins. Currently, BTC’s dominance is still rising from the post-FTX low, suggesting BTC has more room to run before altcoins reach the finish line.
Altcoins significantly outperform in the second half of the cycle
In both major cycles, altcoins have significantly outperformed Bitcoin after an initial phase where their returns were comparable. This trend reflects investors’ increased risk appetite and how reflexive the altcoin market can be with increased risk capital. In the second half of the 2015-2017 cycle, altcoins returned 344x compared to BTC’s 26x. Similarly, in the second half of the 2019-2021 cycle, altcoins returned 16x compared to BTC’s 5x. We are about halfway through the current post-FTX cycle, with altcoins slightly lagging BTC. This trend suggests potential altcoin outperformance in the second half.
Macroeconomic influence
Cryptocurrencies, like other risk assets, are highly correlated with global net liquidity conditions. Global net liquidity has increased by 30-50% over the past two cycles. The recent second-quarter sell-off was partly driven by tighter liquidity conditions. However, as second-quarter data confirmed slowing inflation and growth, the trajectory for a Fed rate cut seems favorable.
The market is now pricing in a more than 95% probability of a September rate cut, up from 50% at the start of Q3. Additionally, cryptocurrency policy is becoming a central focus in the U.S. election, with Trump backing cryptocurrencies, which could influence the new Democratic nominee. The last two cycles have also overlapped with the U.S. election and BTC halving events, adding to the rally potential.
The story continues
Could it be different this time?
While history doesn’t exactly repeat itself, the rhyming nature of past cycles (initial Bitcoin dominance, subsequent altcoin outperformance, and macroeconomic influences) predisposes to an altcoin rally. However, this time may be different. On the bright side, BTC and ETH have reached mainstream adoption via ETFs, with record inflows from retail and institutional investors.
On the cautious side, a larger and more diverse set of altcoins are competing for investors’ capital, and many new projects have limited circulating supply due to airdrops, leading to future dilution. Only ecosystems with solid technology and the ability to attract developers and users can thrive in this cycle.