What is altcoin season: how liquidity charts the path to altseason

Are you a veteran in the crypto scene? If so, the phrase 'crypto is cyclical' should seem familiar given how liquidity and money flow in the crypto markets. When Bitcoin consolidates in an established range, traders can't help but wonder if this is a sign of a possible upcoming rotation into altcoins in what's commonly known as 'altseason': a common abbreviation of the terms altcoin and season. With the last altseason happening in early 2021, many traders are optimistic for the future. There's much anticipation for this bull market cycle's version of altseason frenzy, when altcoins exponentially outperform Bitcoin and Ether.

Want to learn more about this cyclical phenomenon? From breaking down crypto money liquidity flows to providing actionable tips to capitalize on this euphoric phase of the crypto market, here's everything you need to know about altcoin season and how the possible path to altseason will play out.

TL;DR

• Altcoin season is a period of increased interest and price appreciation in cryptocurrencies beyond Bitcoin.

• Altseason is normally characterized by a decline in Bitcoin dominance, rising altcoin trading volumes, and social media hype.

• Historically, altseasons have followed a pattern of Bitcoin rallies, Ethereum's rise, large-cap altcoin growth, and finally, a surge in small-cap altcoins.

• To prepare for altseason, diversify your portfolio, time your entries and exits with technical analysis, implement robust risk management, and stay informed about market trends.

• Avoid common pitfalls like chasing hype, neglecting macroeconomic factors, over-leveraging, and not taking gains.

What is altcoin season?

An altcoin season is a period characterized by a surge in interest in crypto projects beyond Bitcoin, and emerged with the expanding diversity of the crypto market. During this time, altcoins experience significant rallies that outperform Bitcoin itself. This shift in market focus is typically accompanied by increased trading volume for altcoins and a decline in overall Bitcoin dominance. Altcoin seasons are often indicative of a bullish market sentiment and growing adoption of crypto among existing and new crypto traders as a fresh wave of optimism drives the market to new heights.

The history of altcoin seasons

Source: TradingView

One of the first notable altseasons occurred in 2017 during the Initial Coin Offering (ICO) boom, as promising projects like Ethereum (ETH), Ripple (XRP), and Litecoin (LTC) surged in popularity by promising innovative use cases that outshined Bitcoin's digital gold narrative. This euphoria peaked with the bull market of late 2017 and was driven by rampant speculation. This altseason eventually came crashing down in 2018 as regulatory crackdowns and failed projects deflated the bubble.

Source: TradingView

Another noteworthy altcoin season emerged in 2020 and 2021 in what was termed as DeFi summer, where altcoins related to DeFi, metaverse, and NFTs reached unprecedented heights. This included projects like Uniswap (UNI), Sandbox (SAND), and Solana (SOL). However, as market optimism waned amid rising interest rates and bearish macroeconomic trends in 2022, altcoins suffered sharp declines. As a whole, each altseason has been marked by innovation-driven rallies followed by corrections that reflect the market’s struggle to balance speculative interest with sustainable growth. It's this cyclical nature of crypto money flows and liquidity rotations that builds the foundations for what's commonly known as liquidity flows in crypto.

What are liquidity flows in crypto? Understanding crypto market cycles

Liquidity flows refer to how capital moves within the cryptocurrency market. To simplify the complex concept, think of it as a domino effect: money enters the market and flows through various assets in a predictable sequence of liquidity across Bitcoin, Ether, large-cap altcoins, and finally, smaller-cap altcoins. Understanding these flows allows traders to position themselves for maximum returns during different phases. At the core of liquidity and money flows in the crypto space is Bitcoin. From there, capital shifts to Ether, then to large-cap altcoins, and finally to smaller micro-cap altcoins as traders seek higher returns.

Why crypto money flows matter

Understanding liquidity flows is crucial for identifying potentially fruitful trading opportunities, as each phase of the liquidity flow cycle offers unique risks and rewards. Recognizing where capital is likely to flow next allows traders to strategically allocate their portfolios and maximize returns. For example, anticipating a shift from Bitcoin to Ether enables traders to get ahead by being positioned in assets that are poised for significant price movements.

Additionally, liquidity flows help traders better understand market cycles. Knowing when capital is likely to leave smaller altcoins and return to Bitcoin can prevent traders from holding onto assets during periods of declining liquidity and potential price drops. Finally, as liquidity moves toward smaller-cap assets, volatility tends to increase. Traders who understand these dynamics can manage risk effectively, either by diversifying into safer assets or by capitalizing on high-risk, high-reward opportunities.

The path to altseason: what are the four phases of crypto money flow?

The journey to altseason follows a well-recognized pattern of crypto money flow, broken into four distinct phases. This cycle is based on the widely shared “path to altseason” chart from January 2021 and provides insight into how capital moves within the crypto market. Each phase builds momentum for the next, ultimately culminating in the euphoria of altseason.

Phase 1: Bitcoin dominance

• What happens: Money initially flows into Bitcoin as traders prioritize its relative stability and brand recognition as the coin with the largest market cap. Bitcoin's role as a "safe haven" in the volatile crypto market and its position as the primary entry point for new traders amplify its dominance. Institutional investors often begin their crypto journey with BTC, further fueling its rise.

• Key indicators: Bitcoin dominance rises, while altcoins underperform. BTC’s trading volumes surge as capital concentrates on the leading cryptocurrency. Historically, this phase sets the stage for broader market activity.

Phase 2: Ethereum gains momentum

• What happens: As Bitcoin's rally starts to plateau, traders and investors begin shifting liquidity to Ethereum. This phase is driven by speculation on Ethereum’s growing ecosystem that range from popular DEXs like Uniswap (UNI) to newer DeFi projects like Ethena (ENA).

• Key indicators: Ether’s price appreciates significantly against Bitcoin, and ETH’s market cap share increases. This shift signals a growing interest in assets with more versatile use cases, marking Ethereum as the second dominant player in the market.

Phase 3: Large-cap altcoins rally

• What happens: With Ethereum’s growth stabilizing, attention turns to large-cap altcoins. These are well-established projects with strong followings and significant market caps. You may also discover trending large-cap altcoins that are tied to emerging narratives, such as AI-related projects or Layer-1 blockchains competing with Ethereum. Keen to uncover other categories? See our price page data to unearth a variety of unique crypto narratives.

• Key indicators: Large-cap altcoins exhibit impressive growth, frequently posting double-digit gains. Meanwhile, Bitcoin and Ether remain relatively stable, with their trading volumes decreasing as interest shifts to the broader altcoin market.

Phase 4: Altseason arrives

• What happens: Altseason is the culmination of the cycle, characterized by widespread enthusiasm and speculation across the crypto market. Liquidity flows into small- and micro-cap altcoins, which often deliver exponential gains. Speculative projects, memecoins, and niche tokens dominate the narrative as traders chase high-risk, high-reward opportunities. This phase is marked by market-wide euphoria and significant social media activity.

• Key indicators: Bitcoin dominance drops sharply, often falling below 40%. Smaller-cap altcoins see parabolic growth, with many reaching all-time highs. Sentiment indicators, such as Google search trends and social media mentions, skyrocket as retail investors pile into the market, driven by fear of missing out (FOMO).

Understanding these phases is crucial for navigating the crypto market effectively, as they highlight the cyclical nature of money flow and the opportunities and risks inherent in each stage of the journey to altseason.

Altseason indicators: how to tell altcoin season is near

Anticipating altseason involves tracking key metrics and signals that reveal shifts in market behavior and sentiment. These altseason indicators can effectively help traders prepare for the influx of capital into altcoins, maximizing opportunities while managing risks effectively.

1. Bitcoin dominance

• As previously mentioned, Bitcoin dominance represents the ratio of Bitcoin’s market cap to the total cryptocurrency market cap and often serves as an early warning signal for altseason. A steady decline in BTC dominance suggests that liquidity is moving away from Bitcoin and into altcoins as traders seek higher returns.

• Historically, altseason tends to occur when Bitcoin dominance falls below 40%. A sharp drop combined with stagnant or plateauing BTC prices can confirm this shift in sentiment.

2. Altseason index

• Tools like Blockchain Center’s Altseason Index quantify whether the market is favoring altcoins over Bitcoin. These indices aggregate data on price performance, trading volumes, and market sentiment to provide a comprehensive view of altcoin activity.

• An Altseason Index reading above 75 typically indicates that the majority of top altcoins are outperforming Bitcoin, signaling that altseason may already be underway.

3. Market sentiment

• Market sentiment plays a crucial role in fueling altseason. Positive sentiment is often driven by favorable news, such as major partnerships, technological advancements, or successful launches of new projects. These developments can create a wave of optimism that boosts trading volumes and altcoin prices.

• Monitor sentiment indices as well as trading volume spikes across major exchanges. A shift from fear or neutral sentiment to greed often coincides with the start of altseason.

4. Social media excitement and hype

• Social media platforms, particularly Twitter, Reddit, and Telegram, amplify altseason narratives. The rise of trending hashtags, memes, and discussions about specific altcoins often signals growing retail interest and speculation.

• A surge in social media activity focused on niche altcoins as well as increased influencer coverage can be a leading indicator.

5. Trading volume divergence

• As altseason approaches, trading volumes for altcoins on major exchanges like OKX tend to rise disproportionately compared to Bitcoin.

• This shift indicates growing trader confidence in altcoins as there's a desire for greater gains in the crypto space.

6. Ether to Bitcoin Ratio (ETH/BTC)

• Ethereum often leads the altcoin market. A rising ETH/BTC ratio suggests Ethereum’s outperformance relative to Bitcoin and acts as a precursor to altcoin rallies.

Closely monitoring these metrics can pay dividends in the long run as traders can better position themselves to capitalize on altseason while mitigating the risks associated with speculative markets.

Common altseason missteps to avoid

Altseason presents exciting opportunities, but it also comes with significant risks. Many traders fall into common traps during this highly volatile period, which can lead to substantial losses. Avoiding these pitfalls requires discipline, preparation, and awareness of market dynamics.

1. Chasing the hype

• The euphoria of altseason often triggers a wave of FOMO, pushing traders to make impulsive decisions without proper analysis. Projects with little to no fundamentals can see parabolic price increases purely based on hype, leaving latecomers vulnerable to sudden crashes.

• Avoid chasing moon candles and stick to a trading plan that prioritizes projects with strong fundamentals, clear use cases, and active development teams. To complement this, use technical analysis and set realistic price targets to guide your entries and exits.

2. Not keeping up to date with macroeconomic trends

• Altcoin prices aren’t isolated from broader market conditions. Macroeconomic factors like regulatory news, interest rates, and global financial trends can significantly impact the crypto market’s overall momentum. Ignoring these trends can lead to poorly timed trades.

• Stay informed by following global economic developments, central bank announcements, and regulatory updates. In doing so, you can gain valuable insights when it comes to overall crypto market movements.

3. Over-leveraging

• The potential for outsized gains during altseason often tempts traders to take on excessive leverage given. While it may be tempting to take advantage of our 100x leverage offerings, high leverage amplifies losses during sudden price corrections, leading to liquidations and significant losses.

• Limit the use of margin and leverage to manageable levels, and only trade with funds you can afford to lose. Make sure you understand the risks and have a solid risk management strategy, including stop-loss orders.

4. Not taking gains

• The anticipation of further price gains often causes traders to hold onto assets for too long, resulting in missed opportunities when the market reverses. Altseason rallies are often short-lived and followed by sharp corrections.

• Set predefined profit-taking levels and stick to them. Use a tiered approach by selling portions of your holdings at different price milestones to secure gains while leaving room for additional upside.

• If you're keen on HODLing your holdings, make sure to get the most gains out of them by checking out OKX Earn to get yourself some staking rewards.

Practical steps to prepare for altseason and mitigate risk

Navigating altseason requires a strategic approach to maximize gains while managing the inherent risks of a highly volatile market. Here are actionable steps to strategically position and prepare yourself for the coming market volatility.

1. Diversify your portfolio across trending narratives

• Altseason is characterized by rapid market movements driven by evolving narratives. Diversifying your positions across altcoins linked to strong narratives like Layer-1 blockchains, DeFi protocols, or AI-based crypto projects could help to mitigate the risks of overexposure to a single sector while increasing your chances of participating in significant rallies.

• Research emerging trends and social media sentiment trackers. Once you've found a high conviction narrative, allocate capital to a mix of large-cap altcoins with proven stability and smaller-cap projects with high growth potential but increased risk.

2. Timing your entries and exits

• Timing is critical in a market as volatile as crypto. Entering too late in a rally or exiting too early can significantly impact your gains during altseason. That's where technical analysis tools come in to identify optimal entry and exit points.

• Fibonacci retracements: Useful for identifying potential support and resistance levels during pullbacks.

• Moving averages: Combine short-term and long-term moving averages to spot trend reversals or continuation patterns.

• Relative Strength Index (RSI): Identify overbought or oversold conditions to avoid chasing unsustainable price movements.

• Alongside the above, set realistic price targets and stick to them to avoid emotional trading driven by FOMO.

3. Implement robust risk management strategies

• While altseason presents lucrative opportunities, it's also one of the most volatile periods in the crypto market. Without proper risk management, significant gains can quickly turn into losses.

• Stop-loss orders: Protect your capital by automatically selling assets when their price drops below a predetermined level. Adjust stop-loss thresholds based on your risk tolerance.

• Position sizing: Limit your exposure to high-risk altcoins by allocating a smaller percentage of your portfolio to them, balancing this with safer large-cap options.

• Incremental profit-taking: Secure gains by selling portions of your holdings as prices rise, rather than waiting for a peak that may not materialize. This approach locks in gains and reduces emotional decision-making.

4. Stay informed and adapt quickly

• The crypto market evolves rapidly, and staying ahead of the curve is essential for success during altseason.

• Regularly follow market news, project updates, and sentiment trends. Subscribe to reputable crypto analysis platforms, and consider joining communities like Discord or Telegram groups for real-time insights. Adapt your strategy as new trends emerge to stay aligned with market movements.

By combining diversification, precise timing, risk management, and staying informed, you can position yourself effectively to capitalize on altseason's opportunities while safeguarding your portfolio against its inherent volatility.

Final words and next steps

Altcoin season is one of the most thrilling phases of the crypto market, offering traders the potential for significant gains. By understanding liquidity flows, recognizing the paths to altseason, and using reliable tools and strategies, you can position yourself to take full advantage of this opportunity.

Ready to begin trading with us? Check out our various beginner-friendly products to get started with crypto trading today. From spot trading more than 600 crypto pairs manually and hedging with crypto options to automating your trades with our various trading bots, we have you covered regardless of your trading preferences and experience. Lastly, if you're a memecoin trader yourself, make sure to check out Meme Mode: a self-custodial way to buy and sell your favorite Solana memecoins with zero fees.