Altcoins, however, come with big risks. In a bull market, it is not uncommon for altcoins to rally hundreds or even thousands of %, but down trends and bear markets can lead to substantial drawdowns of sometimes even as much as 90 to 99%.
In the future, it is very likely that we will go through a so-called “altcoin-season” again. In anticipation of this, market participants often are grabbed by a feeling of FOMO (fear of missing out) and invest in many different coins prematurely, just to hold them through big drawdowns.
In this write-up, we are going over 3 key steps to determine when it is time to move the focus on trading (or investing in) altcoins.
First and foremost, it is crucial to watch the Bitcoin Dominance chart (ticker: BTC.D.). The Bitcoin dominance chart essentially shows us the percentage of the total cryptocurrency market capitalisation that Bitcoin represents.
When BTC.D. trends up, Bitcoin sucks in money out of the altcoin market capitalisation, leaving altcoins to bleed lower down.
Typically, when BTC.D. is bullish, most altcoin pairings go down significantly against Bitcoin.
At the time of writing, BTC.D. is trading at 51.86%, meaning that 51.86% of the total cryptocurrency market capitalization is made of Bitcoin only.
More than that, BTC.D. is looking extremely bullish, as it has broken out of a macro range to the upside.
For almost two years, BTC.D. has ranged between 39.66% (range low) and 48.69% (range high). Now that we are trading (and closing multiple weekly candles above) the range high, further upside continuation is the most likely outcome.
As a mid-term target, it is to be expected that BTC.D. hits the 57.21% mark again, which was previously a key support level for BTC.D. back in the summer of 2020.
What this practically means is that people anticipating an altcoin season, focusing attention and capital on altcoins instead of in Bitcoin, are likely too early with their swing trades and/or investments.
A more favorable time to get involved in altcoins is when BTC.D. rejects from a resistance (this could be for example at 57.21%) and then starts downtrending. When BTC.D. trends down again, this is when the bigger money rotates from Bitcoin into altcoins and when it makes sense for us to do so as well.
A second very important measure to look at is the ETH/BTC chart. The ETH/BTC chart shows us the value of Ethereum in terms of Bitcoin.
At the time of writing, for example, ETH/BTC currently sits at 0.06140. This means that to buy one whole Ethereum, you would need to invest 0.06140 Bitcoin.
When ETH/BTC trends to the downside, this is indicative of the fact that bigger money is not yet flowing into altcoins as a whole.
Currently, ETH/BTC is looking bearish on the weekly timeframe, having put in lower highs ever since the 2022 September highs.
The main expectation, by looking at this chart, is that ETH/BTC will at least come back down to the 0.04908 level and possibly even lower, to the previous range high at 0.04175.
If ETH/BTC indeed trends lower, this implies that at a later point in time, we will be able to buy Ethereum with less Bitcoin than we would need now. Moreover, when ETH/BTC goes to lower levels, this is not a condition that is favorable for money to flow into altcoins.
In order to have conviction in the fact that it is time to rotate attention to altcoins, we would need to see ETH/BTC at least break the current weekly downtrend, by closing at least 3 weekly candlesticks consecutively above the current downtrend line. If and when that happens, it will be a time when BTC.D. starts to turn down and when it starts to make sense to rotate funds into altcoins.
Lastly, we encourage anyone considering an investment into altcoins to completely forget about the value of that certain altcoin in terms of USD. This might sound counter-intuitive: if I want to invest in an altcoin, surely it’s important to focus on how well it is performing against my fiat currency? Wrong.
In order to make an investment into altcoins, the only thing that needs to be monitored is the performance of that altcoin to Bitcoin. In order to make a successful cryptocurrency portfolio, it always makes sense to value your total portfolio in Bitcoin and in Bitcoin only.
If an altcoin is outperforming Bitcoin (which is represented as an uptrend in the alt/BTC chart), this is when it makes sense to rotate funds from Bitcoin into that altcoin, just so that at a later point in time, the altcoin can be sold again for more Bitcoin, ultimately accumulating as much Bitcoin as you can.
And this brings us to a hard conclusion: altcoins are risky and holding them in the long term should always be done after thoughtful consideration of multiple conditions lining up:
- BTC.D. has to be in a downtrend
- ETH/BTC has to be in an uptrend
- the altcoin that you want to invest or go long on needs to be in an uptrend in it’s pairing to BTC
If you don’t look at these conditions setting up, chances are high that you can get stuck in altcoins for many weeks, months or even years on end without seeing any substantial benefit from them.
EVEN if the altcoin goes up in dollar value, it is still suboptimal to be invested in it if BTC is outperforming it.
At the end of the day, trading altcoins is merely a tool to accumulate the most amount of BTC you can over time.
Don’t focus or marry altcoins. We are here for the money, not for the technology.
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