What is the Altcoin Season Index?

What is the Altcoin Season Index?

The altcoin season index is a tool that tracks how Bitcoin performs in comparison to the top 50 altcoins by market capitalization over 90 days. The 90-day window reduces short-term fluctuations and provides a long-term market view. The performance of these top 50 Altcoins excludes stablecoins and asset-backed tokens like wrapped BTC.

Bitcoin is the world’s largest cryptocurrency, and monitoring how it performs compared to altcoins can help traders know when to buy altcoins.

Traders use the altcoin season index to predict when the altcoin season starts. It can be challenging for traders to monitor the performance and market capitalization of each altcoin, hence the need for the index.

The altcoin season index is made by Blockchain Center and owned by Holger | Source: Blockchain Center

What is the Altcoin Season?

The altcoin season refers to a period in the cryptocurrency market cycle when altcoins perform better than Bitcoin. Altcoin prices surge significantly during this period outperforming Bitcoin.

The bull market is primarily responsible for the altcoin season. It does not mean that Bitcoin performs poorly in a bull market. The reason altcoins have a better chance to generate higher percentage returns than Bitcoin is because of Bitcoin’s larger market capitalization. Bitcoin has a high market capitalization, making it challenging to yield high percentage returns, unlike most altcoins with low market capitalization.

Thus, more buy volume is required to push Bitcoin’s price by 10%, 20%, or even more than for altcoins. The smaller the market capitalization, the easier it will be for an exponential price surge. At the same time, though, smaller cap tokens can dump faster than high cap tokens.

Investors are interested in identifying when the altcoin season begins because it helps them diversify their portfolios. Rather than investing in only Bitcoin, investors can earn more profits by buying other altcoins that may outperform the market-dominant Bitcoin.

How Does the Altcoin Season Index Work?

The index states that the altcoin season has begun when 75% of the top 50 altcoins outperform Bitcoin. This usually occurs during a bull market. The image below shows the performance of altcoins in 90 days from April 19, 2023, through July 18, 2023.

Source: Blockchain Center

The chart shows that between April 19th to July 18th, Bitcoin was the 11th best-performing cryptocurrency among the top fifty, with a 0.2% return increase. The best-performing altcoin is BCH, with an 81.5% increase in returns. The worst-performing altcoin is APE, with a 53.3% decrease in returns.

Notably, only 25% of altcoins outperformed Bitcoin during these 90 days. This indicates that the market is far from the altcoin season since 75% of alts would need to outperform Bitcoin for the altcoin season to kick off.

How to Read the Altcoin Season Index

Source: Blockchain Center

The altcoin season index has a linear indicator with rainbow-like colors that indicate what season the crypto market is. The extreme left and right of the indicator have red colors, while the mid-section of the indicator has a blue-green color.

When the index value is inclined towards the left side, it’s Bitcoin season. If inclined towards the right side, it’s the altcoin season. The value is obtained by comparing the gains of all altcoins combined with Bitcoin’s gain within 90 days.

A value between 35 and 70 would be in the blue-green zone. At this level, Bitcoin gains and altcoin gains are almost on par.

How does the Altcoin Season Index Calculate these Percentages?

The index determines the ratio of altcoins that outperform Bitcoin in percentage price change by dividing the number of altcoins that perform better than Bitcoin by the total number of altcoins examined (the top 50). The result is multiplied by 100 to get a percentage.

The altcoin season index translates this percentage to determine the altcoin season by using a scaling matrix. The index records 100 if 75% of the top 50 altcoins examined perform better than Bitcoin. If this happens, the index states that the altcoin season has started. If the percentage is between 0%-25%, the index records 0, which indicates a substantial absence of an altcoin season. If that percentage ranges between 25%-75%, the index adjusts and shows varying intensity in the altcoin season.

Triggers for the Altcoin Season Index

Traders may not always identify when the altcoin season begins because it can be unpredictable. However, some factors may trigger how the index arrives at its calculations. Two notable triggers are market sentiment and technological advancement.

Market Sentiment

The market sentiment reflects the attitudes of investors in a market, either positively or negatively. When the market sentiment is bullish, investors often have a high-risk appetite and look to earn more profit by buying altcoins, triggering the altcoin season. Most of these altcoins have low market capitalization, and when large amounts of money are invested into them, their prices rally, resulting in a significant percentage increase.

Additionally, the high cost of purchasing Bitcoin can cause potential buyers to buy altcoins. Most altcoins are affordable, and buyers can accumulate more units of them. In these cases, when altcoins make any significant percentage increase, it would mean more profits.

Technological Advancement

When an altcoin improves its technology by introducing innovations in terms of new projects and features, and blockchain upgrades, it attracts investors. If investors are optimistic about certain altcoins’ technological advancements, their prices can rise sporadically, primarily if more traders also aim to benefit.

Most times, altcoins enjoy the attention of investors because these technological advancements solve specific problems in the blockchain ecosystem, for example, scalability and efficiency issues. Optimism and Arbitrium are layer-2 scaling solutions and are arguably among the most popular. The success of these rollups can be attributed to the scalability problem they solve in the blockchain ecosystem.

Bitcoin’s Dominance

The altcoin season is marked by altcoins performing better than Bitcoin, but Bitcoin’s performance largely determines its success. When Bitcoin is bullish, altcoins can follow suit. However, when Bitcoin remains relatively stable, more money flows from Bitcoin to leading altcoins.

Although most investors look to diversify their portfolios, they still hold some units of Bitcoin as part of their investment. Bitcoin remains dominant due to its considerable measure of stability in price volatility. Bitcoin’s performance continues to be crucial to shaping the altcoin season.

How to Trade Using the Altcoin Season Index

The altcoin season index can be helpful during bearish or bullish market cycles. However, the index is more important to traders during the bull season when altcoins rally, and there is potential to make larger profits.

Traders may employ technical analysis strategies to complement the data obtained from the index to determine which altcoin is best to invest in. Chart patterns such as double bottoms, the Quasimodo reversal pattern, and inverse head and shoulders can signal a shift toward a bullish sentiment. Break and retest of significant resistant lines may also indicate a solid bullish intent. Traders can use these to know when to buy desired altcoins.

Traders can diversify their portfolios and mitigate risk by investing in promising altcoins from the top 50. Apart from stating that it might be an altcoin season, the index also indicates the best-performing altcoins by showing the percentage gain.

Source: Blockchain Center

For example, the chart above shows that ten alts have outperformed Bitcoin in the last 90 days. An investor may decide to research any of these to find out what triggered their value increase. One good signal is if the altcoin has an active team of builders improving the protocol. Then, the investor can make a decision.

Traders must also determine when it might be too late to buy one of the best-performing altcoins. For instance, the chart indicates that BCH has gained over 81.5%. Might this still be a good buy? What innovation is backing this increase? Is it hype? Is it a partnership? Questions such as these can help traders make a decision.

In the case of Bitcoin Cash, most of its price surge came in late June after BCH was listed on the EDX Markets crypto exchange. Between June 20 and June 30, BCH surged by over 100%.

The Benefits of the Altcoin Season Index

Here are some benefits of using the altcoin season index:

• Valuable Data and Trend Insight: The index goes beyond providing data on the top 50 altcoins. It also helps investors to have a deeper understanding and knowledge of trends and dynamics of the market.
• Ease of Use: The altcoin season index is one of the easiest tools for analysis. The varying color zones and figures are easy to spot and interpret.
• The Index Aids Portfolio Management: The chart of the altcoin season index tells traders what to store in their portfolio. An uptrend tells traders to stack more altcoins, while a downtrend tells traders to tilt toward Bitcoin or stablecoins. Thus, the index can be helpful for traders in portfolio management and diversification.

The Disadvantages of the Altcoin Season Index

Here are some disadvantages of using the altcoin season index to make trade decisions:

• High volatility of altcoins: The volatility of some altcoins can be extreme, especially during the altcoin season. The increased volatility can be a double-edged sword. Traders can make a tremendous amount of money, and they can also lose a fortune. Other dangers to avoid include:
• The Index does not account for all factors: Traders should avoid depending only on the index to make investment decisions. The index provides valuable data, but just like any other indicator, it does not account for all the factors that influence the market. Other factors affect the prices of cryptocurrencies, such as regulatory measures, technological advancements, and news. All of these factors should be considered in addition to the index.
• The altcoin season index cannot be used for short-term trades: The altcoin season index cannot be used for scalping or short-term trades. Even though it gives an idea of the current trend for alts, it is best suited for making mid and long-term investment decisions.

Conclusion

This article has explored the basic nuances of the Altcoin Season Index, and it can be a good indicator for investors to know which altcoin to invest in. Although using the index as the only basis for making investment decisions is not advisable, it provides valuable information.

If traders can interpret the data from the Altcoin Season Index, there may be a potential to make a profit. However, due to the volatile and unpredictable nature of the markets during these periods, traders do well to use risk management strategies such as setting stop losses and using appropriate leverage.

Traders should also avoid neglecting risk management principles and endeavor to observe the state of the market broadly. The index only records the performance of the top 50 altcoins and does not focus on the performance of lesser-known altcoins that may offer rewarding opportunities.