The Economics Behind Alt-Seasons, a Case Study of May 2021

ABTRACT

Alt-seasons are defined as a short-term burst in valuation that outperforms both Bitcoin and its respective historical trends. A famous example of such can be of May 2021's alt-season, where alt-coins like Ethereum outperformed and hit short-term all-time-highs of 4k (Fig. 1), although different exchanges may vary with exact numbers. These alt-seasons, summarized, are caused by market momentum that disturb cash influx, causing substantially higher amounts of cash to flow into alt-coins.

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Fig. 1, a depiction of Ethereum's all-time-high of around 4.20k USD (nice).

REASONS

The fundamental cause of the phenomenon of alt-coin season can be traced back to Bitcoin. It's massive market cap and dominance relative to the rest of the crypto market creates a high influence factor on alt-coins, as demonstrated in Fig. 2. This is where the phrase 'whatever Bitcoin does, alt-coins do' comes into light, because it's simply the market influence that causes such a likeliness in both Bitcoin and alt-coin trends.

What causes these specific alt-coins seasons however, can be traced to momentum shifts within Bitcoin (Fig. 3). Everything was going well for Bitcoin for a few months, causing a sustained market momentum tunnel. However, once Bitcoin had broken the Wyckoff distributive pattern and fell off its market trend, due to market momentum lag as previously demonstrated in Fig. 2, the overall crypto market still followed its tunnelled trend for a few weeks.

However, with alt-coins looped in a tunnel trend and Bitcoin down 45%, the usual market cash influx was disrupted. Instead of Bitcoin soaking investor money, most of that cash went to alt-coins instead due to a greater dominance as a result of Bitcoin correcting and the power void left from it. This shift in market momentum was why although market-cap still kept pace, many coins like Ethereum and Cardano (ADA) 2x'ed in a matter of weeks. For purely comparison's sake, Fig. 4 depicts such movement.

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Fig. 2, an illustration of Bitcoin's price trends compared to the rest of the crypto-market's trends. Notice the 1-2 month lag behind a Bitcoin correction and when the rest of the market follows behind.

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Fig. 3, a in-depth comparison of the most recent, May 2021 alternative-coin season.

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Fig. 4, a depiction of Ethereum's recent pump v. generalized market cap and Bitcoin momentum.

AFTERMATH

The aftermath of such alt-coin season was a ugly one to say the least. This pump was unsustainable because it relied on a power gap and a differential in Bitcoin dominance, not a more economically sustainable factor such as institutionalized interest or mass-adoption for instance. As a result, naturally, the power bubble collapsed, leaving many alt-coins in the dirt.

This being said, any further alt-coin seasons reliant on such an unsustainable factor should be perceived with suspicion, especially if it has to do with messing around with Bitcoin. Bitcoin is king in the market, not because of technology or use cases, but because of its inherent power it welds with such a large market cap, although in the later years, this might be subject to change. However, this is also why it acts like such a good hedge against short-term bear markets, because when the cash also flows back into Bitcoin in times of strife due to the reliance on such a stable market dominance. More of this on future posts though.

TO CONCLUDE

It is quintessential for any investor to realize such patterns. These trends inherit to cryptography and economic structure can become powerful tools when analysing different alt-coins. Although this isn't the most in-depth explanation of the economy behind alt-coins, I hope this has at least made a difference your understanding, or in what most retail investors now call 'tokenomics'. A jazzy term to say the least lol.

Disclaimer: I am not a licensed financial advisor nor does this content attempt to replicate any of the sort. This content is listed strictly for entertainment and educational purposes. When in doubt, contact a professional. Your money, your problem.