Which Coins are Preforming Well Tends to Rotate (Cryptocurrency Market Cycles and Historical Repeating Trends)
In cryptocurrency, which coins are performing well tends to rotate. Sometimes BTC is dominant, sometimes alts are, sometimes a single coin like ETH will take the lead.
In general, Cryptocurrency tends to be pattern-based, especially when it comes to price.
One pattern-of-sorts that tends to occur is that it is common for a certain coin, or a certain set of coins, to be a hot commodity while other coins or sets of coins that were previously hot cool off. Is ETH hot? Is Dogecoin hot? Is it alt season? Is it DeFi season? Or is BTC just outperforming everything? Is everything bullish? Is everything bearish? Each one of these phases is a different part of self-similar repeating crypto cycles.
In other words, which coins have high volume and rapid price increases tend to rotate as buyers and sellers shift from coin to coin like oddly timed clockwork.
There is generally some rhyme and reason here, a run is often spurred on by good news and the end of a run spurred on by bad news, but one should note that what counts as “news” can be pretty weak (a simple internet rumor is often news enough to spark on or squash a run; so keep that in mind).
Back in May – June 2017 we saw a boom of all cryptos, but specifically, altcoins boomed with Ripple and Ethereum seeing all-time highs. In that period it seemed like any coin could make you rich. Then, from September to October, we saw Bitcoin dominance rise. Many alts took a back seat while Bitcoin went on a months-long run, at a point, it looked like alts would never recover! Then we saw Bitcoin Cash become dominant while Bitcoin corrected in early November, alts made a small comeback here. Then we saw Bitcoin come back for one of its biggest runs to $20k until November – early December (and it suppressed almost every other coin). Then, it switched and Bitcoin cooled off while alts went wild (starting with the top alts Litecoin and Ethereum). Then Ripple and other high supply low-cost coins became hot, then those cooled off and Ethereum started running again (and the similar longstanding low supply / high-cost Moreno began doing well too). In between a rotation of minor alts occurred on a daily basis, and we saw attention shift from longstanding coins, to new coins like Cardano, to new coins like Verge, to new coins like Tron, etc. First simple transfer coins like Bitcoin were hot, then privacy coins, then low-0cost / high supply, then coins with networks like Ethereum and NEO, etc.
It wasn’t one pattern, but a few layers of patterns. They all seem obvious in retrospect, but noticing them in real-time is not so easy!
You can essentially see examples of what I’m saying in any cryptocurrency chart on CoinMarketCap.com by looking at the price chart over the history of the coin. However, one place it is really pronounced is on this chart which shows the dominance of major coins over time (the chart at the top of the page). NOTE: Click the following link for an article on dominance and the rotation.
You can see that the dominance of popular altcoins like Ripple and Ethereum grow in waves over time as the dominance of Bitcoin shrinks in waves over time. This could be leading us to some endgame where Bitcoin is no longer the dominant coin, but if the historic pattern holds, it would be leading us there in a wave-like pattern (not a straight line).
Here is an example rotation that has previously occurred and seems to be playing out here in late January 2017 (see: BTC MARKET DOMINANCE HISTORIC LOW !! for the original theory; which I concur with):
1- NEW MONEY GOES TO BTC
2 – BTC BUBBLE POPS
3- MONEY GOES TO ALTS
4- XRP BUBBLE POPS
5- MONEY GOES TO ETH
6- ETH BUBBLE POPS
7- DEEP CORRECTION
8- BTC AT ALL TIME HIGH WHILE MOST ALTS STAY IN CORRECTION.
9- BTC DOMINANCE GETS OVER 50% AGAIN
NOTE: I hope we skip steps 6 and 7 this time, but here we aren’t talking about hopes and wishes, we are talking about recognizing historic patterns and keying into the reality of the rotation. The reality is, from November 2017 – late January 2018 steps 1 – 5 have played out like clockwork.
UPDATE May 2019: We certainly did not skip those final steps. Instead, the second half of 2018 was a bloodbath (like clockwork), then we went back into a form of the rotation. One thing I’ll say from experience, and since I’m adding notes here over a year later, is that the above rotation isn’t exact. It is an example of what we see. We see one crypto or subset of cryptos run, then we see that rotate, in between there is corrections, and BTC, XRP, and ETH are key coins in the cycles (with BTC being the most important). So don’t expect the above to repeat exactly, but do expect cycles and sub-cycles to repeat in general.
The bottom line here is: the cryptocurrency market rotation described above in a few different ways, where one or more coins heat up making serious gains while other previously hot coins struggle and might correct by as much as 50%+, is extremely common in cryptocurrency.
Likewise, the wave-like pattern which includes a quick run-up and then a gradual decline over time in between rotations is also common.
Understanding this we can plan for the next wave and be aware of the current rotation (or at least be cognizant of it while investing). Knowing we are at the end of a rotation helps us to understand that perhaps trying to spot the next phase will be more fruitful than buying the high of the last one! History doesn’t have to repeat, but it certainly does often anyway.
Consider this: Putting aside reasons for building long positions such as aiming to pay the long-term capital gains rate, and speaking on short positions: when a popular coin is on a run, being in it for that run is ideal. And likewise, when a popular coin is done running, taking some profits and rotating them into the next coin that will run is also ideal. If we do not ourselves rotate, then we have to HODL through the rotation (which can be justified for long positions, but simply isn’t ideal for shorter-term investments). Simply, if we don’t rotate out, others will, and we will be stuck with bags.
Understanding the natural rotation in cryptocurrency is vital by these metrics. Thus we want to learn how to spot the rotation as best we can.
Generally speaking, you’ll know a top coin is “in rotation” when it, and potentially others like it, are all doing well in unison while other top coins are stagnant or losing fiat value. The process generally starts with jumps: a positive jump in the up-and-coming coin, and a negative dip in the coin about to leave rotation.
For example: if Bitcoin, Bitcoin Cash, Bitcoin Gold, and Litecoin are all running and alts are taking losses, we can assume its a period of BTC dominance; Or, if Ripple, Stellar, Ada, and New Economy Movement are all running, and BTC is struggling, we can assume the market is demanding low cost / high supply coins; Or, if Ether and ERC-20 tokens are running and other coins are lagging, we can assume its a period of Ethereum dominance.
If we see one set of events occur while another set of coins starts to cool off, we can speculate that this might be the start of a new rotation. If we notice trends changing on social media, that only helps confirm things.
If we assume that we will see whatever happens happen in waves, it can give us a sense of what we might expect next given the current position of the current wave.
Thus, if we notice this and notice it early, we can start bracing for what comes next by setting stops on the coins we think are cooling and buy orders on the ones we think are heating up.
The bottom line is: the sooner you pick up on the rotation, the sooner you can yourself rotate. The longer a run goes on, the less ideal it is to jump on the train, thus picking up on the trend early is vital.
The problem is, a run can be a short as 24 hours and as long as a few weeks to (or in the case of a top coin like Bitcoin, months).
The longer you wait to rotate, the more you risk buying at a price higher than the coin will see when it corrects. Thus, you lose wiggle room.
This can create a really depressing scenario where you wait and wait, and then the coin never cools, so you jump in, only to find you just bought the all-time high. That never feels good. Or, you can get into this trap where you keep “buying the dip” on the coin that is cooling off, having to average your way into a 50%+ correction while another coin or set of coins is running. That never feels good.
In fact, a lot of what doesn’t feel good in crypto comes from buying the coin that was hot last week and ignoring the coin that is hot this week. In ways, we are better off ignoring both and building a long position in a coin that hasn’t been in rotation recently then we are being late to the party and chasing coins. However, better than all that is spotting the rotation early and reacting ASAP.
There are programs and strategies that can help you see this (bots and signals), keeping an eye on the news and social media can help you spot trends, learning even some basic technical analysis to spot long term trends is very helpful, but there is no magic crystal ball. Thus, the best advice is I can offer is just “be aware that this is a thing.” The mood of the market changes, if you can sense the mood early, there is a lot of potential profit in there (and almost more importantly, a lot of opportunities to protect your investments).
TIP: One simple thing to do to protect against the end of a run is to set a trailing stop of about 10% (something you have to do manually on most exchanges), or just set a stop 0f 10% and move it up to lock in gains. There is no foolproof plan, but doing this will help you avoid suffering through a 50% correction at the end of the run. It is one of many tools a person might pull out of their tool kit depending on the situation.
TIP: When a run is done, after 100%, 1,000%, 10,000% gains, in such times when the short-term average has fully crossed under the long term on the 1 day or more candles, we must logically concede that the run is over for now. In these times it is not generally wise to aggressively buy the dip and HODL. It is time to back off while the coin cools and keep an eye on the trend lines for a recovery. All good coins are likely to come back into rotation, but since that could be 3 to 6 months out, it is important to be realistic about how the coin is likely to perform in the short term. What is likely is that it will give back some of those 1,000% gains slowly over time. You don’t need to be a martyr, you can take a step back and catch it on the way back up months down the road. Even good altcoins can lose up to 80% of their BTC and/or fiat value between rotations, you need to know this is on the table and plan for it.
UPDATE 2019: Look at the chart below, this is how the dominance chart played out. You can clearly see those XRP, ETH, and LTC cycles, you can clearly see their relation to BTC cycles. The rotation has been a thing historically, it will likely continue to be.