Why do we need an alt season? A financial education analysis
As Warren Buffett once said about market cycles revealing who's truly prepared, altcoin seasons serve as crypto's ultimate stress test. While Bitcoin dominance shifts and liquidity floods the market, only projects with real execution survive the inevitable tide change.
Understanding cryptocurrency market cycles through the lens of capital rotation and liquidity dynamics
In the ever-turbulent waters of cryptocurrency markets, cycles come and go like the phases of the moon—Bitcoin rallies, altcoins simmer, and then, suddenly, the spotlight shifts. This phenomenon, known as “alt season” or “altcoin season,” sparks endless debate among traders, developers, and investors. Is it a necessary evil? A market inefficiency? Or simply the natural ebb and flow of innovation in a nascent asset class?
The question at the heart of it all: Why do we need an alt season? After all, blockchain technology marches on regardless of price action. Projects build, users adopt, and ecosystems expand. Yet, in crypto’s short history, alt seasons have repeatedly injected vitality into the space, redistributing capital, amplifying discoveries, and weeding out the weak. Drawing from market metrics like Bitcoin dominance, the broader macroeconomic tide of money supply expansion, and even Warren Buffett’s timeless wisdom on market illusions, we’ll unpack why these periods aren’t just hype—they’re essential for a healthy, evolving crypto ecosystem.
Decoding Bitcoin dominance: The market’s barometer
To understand alt season, we must first grasp Bitcoin dominance (BTC.D), a simple yet profound metric that serves as the crypto market’s barometer. BTC.D measures Bitcoin’s share of the total cryptocurrency market capitalization, calculated by dividing Bitcoin’s market cap by the aggregate market cap of all cryptocurrencies.
Bitcoin dominance fluctuates significantly with market sentiment. When BTC.D rises above 60%, it typically signals Bitcoin’s “flight to safety” appeal, where investors flock to the original cryptocurrency amid uncertainty, sidelining riskier altcoin investments. Conversely, falling dominance often hints at capital rotation: profits from Bitcoin’s gains flow into altcoins, sparking broader market participation.
Why does this matter? Bitcoin isn’t just the largest cryptocurrency by market cap; it serves as the primary gateway for institutional and retail capital entering the crypto ecosystem. High dominance can concentrate liquidity in one asset, leaving thousands of altcoins—ranging from Ethereum’s smart contract platform to niche tokens powering DeFi protocols—starved for attention and funding. Without periodic shifts, the ecosystem risks stagnation, much like a monopoly constraining competition in traditional markets.
Alt season: The great capital rotation
Alt season represents that phase where altcoins outperform Bitcoin, often delivering substantial gains that exceed Bitcoin’s performance. It’s not a formal market event but rather a cyclical state, typically triggered when Bitcoin consolidates after a rally and investors seek higher-beta opportunities.
Historical data shows alt seasons typically emerge when Bitcoin dominance falls below 50-55%, as witnessed during the major cycles of 2017 and 2021. Key characteristics include:
Outperformance Patterns: Alt seasons are commonly measured by tracking whether the majority of major altcoins (typically 75% of the top 50 cryptocurrencies excluding stablecoins) outperform Bitcoin over a 90-day period.
Liquidity Dynamics: Capital rotation occurs as early Bitcoin profits chase potentially higher returns in smaller-cap alternatives, following traditional risk-asset patterns observed in equity markets.
Innovation Discovery: These periods often coincide with technological breakthroughs or adoption milestones in specific blockchain ecosystems.
So why does alt season happen? It’s fundamentally about liquidity rotation—a risk-on market environment where post-Bitcoin profits seek asymmetric returns across the broader cryptocurrency landscape. Psychologically, it democratizes potential gains: after Bitcoin captures early institutional and conservative retail investment, alternative protocols receive their opportunity for capital allocation.
From an ecosystem perspective, alt seasons function as discovery engines, surfacing undervalued projects and attracting new liquidity to innovative protocols. They also serve as market stress tests: legitimate projects with strong fundamentals tend to emerge stronger, while speculative ventures often fade during subsequent downturns.
The macro context: money supply as the ultimate tide
Beyond crypto’s internal cycles lies a larger macroeconomic force: global money supply expansion, particularly measurable through metrics like U.S. M2 money supply. M2 encompasses cash, checking deposits, savings, and other liquid financial instruments—essentially representing the available capital for economic activity and asset investment.
Historical analysis reveals strong correlations between money supply expansion and cryptocurrency market performance, with M2 growth during 2020-2021 contributing significantly to the bull market, while monetary contraction in 2022 coincided with crypto’s bear market decline.
When money supply expands through quantitative easing or stimulus measures, it creates abundant liquidity that seeks yield across various asset classes. Cryptocurrencies, as alternative stores of value and speculative growth assets, have historically benefited from periods of monetary expansion as investors diversify beyond traditional bonds and equities.
In this context, alt season becomes a symptom of liquidity abundance. Rising money supply lifts asset prices broadly: Bitcoin first, serving as the institutional gateway, then altcoins as speculative capital expands throughout the ecosystem. This macro backdrop often determines whether alt seasons amplify or fizzle.
Buffett’s wisdom: when the tide recedes
Warren Buffett’s famous observation provides crucial perspective: “Only when the tide goes out do you discover who’s been swimming naked”. This wisdom particularly applies to speculative markets where easy monetary conditions can mask fundamental weaknesses.
Cryptocurrency markets embody this dynamic perfectly. During periods of abundant liquidity and alt season euphoria, speculation often dominates: projects with minimal utility experience dramatic price appreciation, vaporware concepts raise substantial funding, and market sentiment overshadows fundamental analysis.
However, when liquidity conditions tighten—as witnessed during the 2018 ICO collapse or 2022’s systematic deleveraging—market reality emerges. Overleveraged protocols fail, projects without genuine utility lose support, and fundamental value propositions become paramount.
This cycle serves an important market function: abundant capital during expansionary periods funds innovation and experimentation, while contractions eliminate unsustainable projects and reward those with genuine utility and strong execution.
Beyond speculation: Identifying sustainable value
Amid alt season excitement and social media speculation about dramatic price multipliers, successful long-term investors focus on projects demonstrating measurable progress rather than speculative potential. Sound cryptocurrency projects don’t require seasonal market attention to create value—they build consistently, compounding utility through execution over marketing.
Infrastructure Leaders: Ethereum maintains dominance in decentralized finance with over 60% market share in total value locked across DeFi protocols, supported by ongoing technical improvements like layer-2 scaling solutions [12].
Scalability Solutions: High-throughput blockchains like Solana have demonstrated capacity for processing millions of transactions daily at fractional costs compared to traditional financial infrastructure, with their ecosystem supporting diverse applications from DeFi to IoT networks [13].
Oracle Infrastructure: Chainlink has established itself as the dominant blockchain oracle network, securing hundreds of billions in value across multiple blockchain ecosystems through its decentralized data feeds [14]. The protocol’s Cross-Chain Interoperability Protocol (CCIP) enables secure cross-chain communications, with partnerships extending into traditional finance through initiatives with SWIFT and major financial institutions [15]. Chainlink’s network effect strengthens as more protocols integrate its price feeds and randomness services, creating sustainable demand for its oracle infrastructure.
Interoperability Protocols: Cosmos pioneered the vision of an “Internet of Blockchains” through its Inter-Blockchain Communication (IBC) protocol, enabling secure value and data transfer between independent blockchain networks [16]. The Cosmos ecosystem comprises over 50 interconnected chains, each maintaining sovereignty while benefiting from interoperability [17]. Projects built using the Cosmos SDK can communicate seamlessly, creating a network effect where each new chain adds value to the entire ecosystem. This architecture has enabled innovations in specialized blockchains, from Osmosis for decentralized exchanges to Terra for algorithmic stablecoins (before its collapse), demonstrating both the potential and risks of the modular blockchain approach.
Real-World Applications: Projects connecting blockchain technology to tangible use cases—from decentralized computing networks to supply chain tracking—demonstrate utility beyond speculative trading.
These represent compounding value creation rather than lottery tickets. Developer activity, measured through code commits and ecosystem growth, provides more reliable indicators of long-term viability than price performance during speculative periods [18].
Market cycles and strategic perspective
We don’t “need” alt season in an absolute sense—blockchain innovation proceeds regardless of price action. However, these cycles serve important ecosystem functions: Bitcoin dominance guides capital flows, macroeconomic liquidity provides fuel, and rotations like alt season ensure capital reaches builders beyond just the most established projects.
As monetary conditions fluctuate and market cycles evolve, remember Buffett’s metaphor: euphoria often conceals fundamental weaknesses. Rather than chasing speculative multipliers that no one can reliably predict, anchor investment decisions in projects demonstrating measurable progress—from user adoption metrics to protocol security records.
The Sagix Compound approach emphasizes positioning across projects that deliver consistent value creation regardless of market sentiment. These may not provide dramatic short-term gains during alt seasons, but their compounding utility and execution strength provide more reliable long-term value creation.
In cryptocurrency’s dynamic ecosystem, alt seasons represent waves that maintain market vitality and capital distribution. Understanding their mechanics helps navigate cycles wisely, but sustainable wealth creation focuses on fundamental value rather than speculative timing.
The next cycle will certainly arrive—market history guarantees this. However, the most successful participants are those building positions in projects with genuine utility, strong execution capabilities, and sustainable competitive advantages, regardless of seasonal market attention.
Sources and references
[1] CoinMarketCap. “Bitcoin Dominance Index Methodology.” Available: https://coinmarketcap.com/charts/
[2] Glassnode. “Bitcoin Dominance and Market Cycle Analysis.” On-Chain Market Intelligence Reports, 2023.
[3] Chainalysis. “Cryptocurrency Market Structure and Institutional Adoption Patterns.” 2024 Crypto Market Report.
[4] CoinGecko. “Historical Altcoin Season Analysis.” Cryptocurrency Market Cycles Research, 2023.
[5] LookIntoBitcoin. “Altseason Index Methodology and Historical Performance.” Available: https://www.lookintobitcoin.com/charts/altseason-index/
[6] Binance Research. “Understanding Cryptocurrency Market Cycles and Capital Rotation Patterns.” Digital Asset Research Series, 2024.
[7] Federal Reserve Economic Data (FRED). “M2 Money Stock Definition and Historical Data.” Federal Reserve Bank of St. Louis. Available: https://fred.stlouisfed.org/series/M2SL
[8] Fidelity Digital Assets. “Cryptocurrency and Macroeconomic Correlations.” Institutional Research Report, 2023.
[9] Goldman Sachs. “Digital Assets and Portfolio Allocation in Changing Monetary Policy Environment.” Investment Research, 2024.
[10] Berkshire Hathaway. “Warren Buffett Annual Letter to Shareholders.” 2001. Available: https://www.berkshirehathaway.com/letters/2001.html
[11] Bank for International Settlements. “Cryptocurrency Market Structure and Systemic Risk Assessment.” BIS Working Papers, No. 1034, 2023.
[12] DeFiPulse. “Total Value Locked in DeFi Protocols.” Real-time data available: https://defipulse.com/
[13] Solana Foundation. “Network Performance Statistics and Ecosystem Growth Metrics.” Technical Documentation, 2024.
[14] Chainlink Labs. “Chainlink Network Documentation and Security Overview.” Available: https://docs.chain.link/
[15] Chainlink Labs. “CCIP Cross-Chain Interoperability Protocol Documentation.” Available: https://docs.chain.link/ccip
[16] Cosmos Network. “Inter-Blockchain Communication Protocol Specification.” Available: https://github.com/cosmos/ibc
[17] Cosmos Hub. “Cosmos Ecosystem Overview and Connected Chains Statistics.” Available: https://cosmos.network/ecosystem/
[18] Electric Capital. “Developer Report: Cryptocurrency and Blockchain Developer Activity.” Annual Developer Analysis, 2024.
Legal disclaimers and disclosures
Educational Purpose Only: This content is provided exclusively for educational purposes. It should not be construed as investment advice, financial planning guidance, or recommendations for specific cryptocurrency investments. All investment decisions should be made after conducting independent research and consulting qualified financial advisors.
AI-Assisted Research Disclosure: This analysis was researched and written with substantial assistance from artificial intelligence technology. While extensive efforts were made to verify information against authoritative sources, readers should independently verify any information before making investment decisions.
Investment Risk Warning: Cryptocurrency investments carry significant risk of loss. Past performance does not guarantee future results. Market cycles, including alt seasons, are unpredictable and can result in substantial losses. All investors should carefully consider their risk tolerance and investment objectives.
Author Holdings Disclosure: As of the time of publication, the author holds positions in Bitcoin, Ethereum, Solana, Chainlink, Cosmos, and other cryptocurrencies mentioned in this analysis. These holdings may create potential conflicts of interest in the analysis presented. Readers should consider this when evaluating the content and should not interpret any discussion as recommendations to buy or sell specific assets.
No Professional Relationship: This content does not create any advisory or client relationship between the reader and Sagix Apothecary. Readers seeking investment advice should consult qualified professionals licensed in their jurisdiction.
Accuracy Limitations: While efforts have been made to ensure accuracy, cryptocurrency markets are highly volatile and information can change rapidly. The authors make no warranties about completeness or accuracy of information presented.
Publication Information: Published by Sagix Apothecary for educational purposes. This analysis represents general market commentary rather than personalized investment advice.
