Will We See Another Crypto Winter or Altcoin Season?
Is another crypto winter looming? Or has altcoin season already begun? The answer lies in the future of these two trends. Investors are constantly looking for ways to anticipate and capitalize on the changes in the market. That’s the reason why crypto investors have kept a closer eye on the various trends and patterns affecting the market. Despite the lack of historical data, crypto analysts have already declared multiple seasonal events for cryptocurrencies.
Examples of Crypto ‘Seasons’?
Crypto Winter
The term crypto winter refers to a period of falling prices. The last time it happened was in 2018. During that time, bitcoin lost 87% of its value. While bitcoin suffered a massive loss, other cryptocurrencies also took a hit, with most reporting losses of over 90% from their all-time highs.
The total market capitalization for cryptocurrencies reached over $3 trillion in November 2021. Then, in February 2022, it fell and has since gone as low as below $1 trillion. This sudden drop has investors and experts worried about the potential of crypto winter. Since then, the market has gone into a period of crypto winter, where Bitcoin has lost more than half of its ATH last year.
Altcoin Season
On the other hand, altcoins refer to all types of cryptocurrencies unrelated to bitcoin, such as dogecoin, bitcoin cash, and Cardano. During the altcoin season, the prices of these alternative assets often surge when compared to bitcoin for a long time.
The altcoin season usually occurs when bitcoin prices fall after a significant rally. This move causes investors to reallocate their profits to other assets, which triggers a new bull market for altcoins. One of the most important indicators of an altcoin season is the Bitcoin Dominance Index, which shows how much of Bitcoin’s total value is compared to the other cryptocurrencies. When the index rises, Bitcoin gains ground relative to the other assets, while a drop indicates the opposite.
The first such season happened in 2017 and 2018. Before 2017, bitcoin was only around nine-tenths of the total market cap. Then, various factors such as the initial coin offering and the rise of unknown coins, such as XRP and Ether, impacted the market.
In less than a year, altcoins have become more than 50% of the market cap. The last period of the altcoin season, which started in 2020, lasted until May 2021. During this time, the price of Ethereum increased from $600 to more than $4,000. On the other hand, smaller coins, such as those from Cardano and Binance, saw surges by over 2,000% and 1,300%, respectively.
DeFi Summer
DeFi Summer was coined in 2020 to describe the rise of cryptocurrencies that allow investors to earn a yield while lending and borrowing money. The event began a speculative frenzy that quickly grew into a $7 billion market. Although it was a one-off phenomenon, the public’s interest in this new sector grew in the spring of 2021.
Unfortunately, DeFi Summer has not yet happened. Despite the controversies surrounding the rise of cryptocurrencies, decentralized finance has remained and continues to mature into its own sector. It offers various financial services, such as loans, insurance, and even staking.
Crypto Winter vs. Altcoin Season
Some people might think that crypto winter is a kind of altcoin season. However, this is not the case. There are very distinct differences between the two. During altcoin season, prices of various types of cryptocurrencies will increase apart from Bitcoin.
Experts claim that altcoin season occurs when 75% of all the top 50 digital assets exceed Bitcoin’s market capitalization within the last 90 days. On the other hand, during crypto winter, the prices of all cryptocurrencies fall below their average bullish trend. It usually happens during the market’s collapse. Despite this, the market can still recover, but it usually takes a long time for the whole market to bounce back.
When Is the Right Time to Buy Crypto?
Although past performance doesn’t predict future price action, it can give us a good idea of what to anticipate. Bitcoin was around for nine years before reliable price data was available because the market was too immature to provide such data.
Since 2011, bitcoin has performed better during certain periods of the year. For instance, during the spring and fall, it performs better than other cryptocurrencies. On the other hand, the summer season is typically a bit muted for bitcoin, as its price tends to close the month around the same level as it started.
Even though we don’t have data on every aspect of the cryptocurrency market, we can see that the average monthly return of Ethereum since April 2016 is a division between the first and second half of the year. The crypto performed well in the first half of the year, with double-digit percentage gains in April and May. On the other hand, in the second half of the year, monthly returns are weaker.
The Psychology Behind Seasons
The human psyche contains certain elements preventing rational thinking and wise decisions.
Recency Bias
Recency bias is a cognitive distortion when people pay more attention to the latest events than the past. It’s common for investors to overestimate the importance of a certain event. They tend to believe that it will happen again.
Although there were multiple events related to the DeFi Summer and altcoin season last year, it does not mean that the market should repeat them. If investors get carried away by the second coming of a certain event or a single cryptocurrency, they might not be able to capitalize on the next wave of growth.
Feedback Loop
When investors believe that the price of an asset will go up, they will want to buy it higher. This phenomenon is referred to as herding in behavioral finance. For example, if enough people believe that a “DeFi Summer 2.0” is on the horizon, they will want to buy decentralized finance tokens. Hence, it increases the demand, creating a stronger narrative and increasing the price. However, the price can crash if the lack of buyers prevents the rally from gaining steam.
This phenomenon, referred to as a positive feedback loop, continues until it reaches its unsustainable level. In extreme cases, it can lead to asset bubbles and crashes.
Final Thoughts
Unfortunately, the lack of historical data makes it impossible to make well-founded forecasts about the current market conditions. For instance, Bitcoin, the first cryptocurrency to be launched in 2009, only has a decade-long history. It has only experienced the post-crisis market conditions through quantitative easing and low-interest rates. Altcoins, on the other hand, have an even shorter history.
The rapid emergence and growth of cryptocurrencies are just but natural. In addition, the phases of contraction and expansion are quite normal regardless of the calendar. Although this phenomenon doesn’t mean that a new cryptocurrency season or DeFi Summer 2.0 won’t happen, it is still hard to predict what will happen next based on past calendar data.
FAQs
Is there a crypto winter looming?
The elements of the impending “crypto winter” are blowing for Bitcoin and other digital assets due to price declines, layoffs, and high-profile defaults. According to common understanding, there will likely be more problems in the last quarter and beyond, making the present downturn comparable to prior crypto winters, though with significant differences. For instance, this time firms have better teams and funding to survive two to three years of a bear market.
Will there be an Altcoin Season in 2022?
Altcoins normally follow the price of BTC as it declines, but when a bottoming process starts, altcoins frequently go up during Bitcoin’s consolidation phases, which usually results in a call for an altcoin season. Analysts are still charting a range of alternative scenarios that point to an altcoin season, despite the fact that Bitcoin’s recent slide below $30,000 indicates that it may be a little early to declare an altcoin season.
How long is a crypto winter?
Although market rates have recently risen, if history is any guide, investors may still face another 250 days of market winter. Grayscale estimates that crypto market cycles run roughly four years, and that the present cycle is about three years and a few months old. Therefore, it can take a while for the winter ice to melt.
Will crypto bounce back?
It has not been a good year for cryptocurrency investors so far in 2022. But the second half of the year is beginning to look better as some light is beginning to filter through. Blue-chip cryptocurrencies like Bitcoin and Ethereum seem to provide attractive entry points, and unique projects like Chainlink that have strong real-world use cases seem likely to stand out over time. Investors, additionally, are still optimistic that the market will recover.
