In the world of cryptocurrency, understanding past market cycles can give us a glimpse into what the future might hold. Kelly Ye, head of research at Decentral Park Capital, delves into this in her latest article. Crypto history might be short, with Bitcoin only celebrating its 15th birthday this year, but we’ve already seen three significant market cycles: 2011-2013, 2015-2017, and 2019-2021. These cycles occur quickly, given that the crypto market operates 24/7, unlike traditional equity markets.
Bitcoin Leads the Way In both the 2015-2017 and 2019-2021 cycles, Bitcoin was the frontrunner, instilling confidence in the market and setting the stage for a broader rally. As optimism grew, investors started pouring capital into altcoins, sparking a wider market rally. Typically, altcoins’ market cap peaks when Bitcoin’s market dominance bottoms out, indicating a shift of capital from Bitcoin to altcoins. Currently, Bitcoin’s dominance is still rising from its post-FTX low, suggesting there’s more room for Bitcoin to grow before altcoins catch up.
Altcoins Outperform in the Later Stages History shows that altcoins significantly outperformed Bitcoin in the latter halves of the past two major cycles. This reflects increased investor risk appetite and the reflexive nature of the altcoin market with more risk capital. For instance, in the second half of the 2015-2017 cycle, altcoins returned a staggering 344 times versus Bitcoin’s 26 times. Similarly, in the latter half of the 2019-2021 cycle, altcoins returned 16 times versus Bitcoin’s 5 times. Post-FTX, we are about halfway through the current cycle, with altcoins slightly lagging behind Bitcoin, hinting at potential outperformance in the near future.
Macro-Economic Influences Crypto markets, like other risky assets, are heavily influenced by global liquidity conditions. In the previous cycles, global net liquidity increased by 30-50%. The recent Q2 selloff was driven by tightened liquidity conditions. However, as Q2 data indicated a slowdown in inflation and growth, the outlook for a Federal Reserve rate cut looks favorable. The market now sees a more than 95% chance of a rate cut in September, up from 50% at the beginning of Q3. Moreover, crypto policy is becoming central in the U.S. election, with Trump endorsing crypto, which could influence the new Democratic candidate. The past two cycles also overlapped with U.S. elections and Bitcoin halving events, adding to the potential for a rally.
Could This Time Be Different? While history doesn’t repeat exactly, the rhyming nature of past cycles — initial Bitcoin dominance, subsequent altcoin outperformance, and macroeconomic influences — sets up for an altcoin rally. However, this cycle could be different. On the positive side, Bitcoin and Ethereum have reached mainstream adoption through ETFs, with record inflows from retail investors and institutions. On the cautious side, a larger and more diverse set of altcoins is competing for investor 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 builders and users may thrive in this cycle.
