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“The primary driver of alt season is a classic ‘wealth effect,’" wrote Hougan on Twitter Friday. “Crypto natives make money in Bitcoin, feel rich, and then look for more speculative assets to invest in.”
Bitcoin (BTC), the long-reigning king of the crypto market, is up 54% year to date, largely thanks to inflows and media hype surrounding new Bitcoin spot ETFs launched by BlackRock, Fidelity, and others—including Bitwise itself. The cryptocurrency even tapped a new all-time high above $70,000 on Friday, up 11.5% over the last seven days.
Yet starting this week, countless crypto runner-ups are grinding up faster: Ethereum (ETH) is up 16.4% at $4,000 even though its prospects for a U.S. spot ETF are still uncertain. Meanwhile, dog-themed coins like DOGE, SHIB, and FLOKI—which were first launched as jokes rather than for any specific purpose or utility—are up 31%, 145%, and 259% respectively.
3/ This happens in the traditional fiat economy as well, where people make money in large-caps and then start investing in small caps, VC, etc. They also make more trips to Vegas. Market rotation and wealth effects are a tale as old as time.
— Matt Hougan (@Matt_Hougan) March 8, 2024
Hougan says the phenomenon is a “tale as old as time” that also plays itself out in traditional financial markets, where investors cash out on profits in large-cap stocks to invest in riskier small-caps.
“What catalyzes alt season is not the percentage return of Bitcoin," he explained, "but the cumulative size of the wealth effect."
Though Bitcoin’s long-term percentage return has declined since its earliest and most volatile days, its absolute gains in terms of market cap have grown exponentially. In February, for example, BTC experienced its largest-ever daily candle close in dollar terms, even though its 45% jump has been beaten in percentage terms.
Ironically, this has given rise to a pattern where altcoins outperform BTC during a bull run even though it was Bitcoin that catalyzed investor gains to begin with—and it gets stronger with time.
Since November 2022, the asset’s market cap has soared by $1 trillion, giving Bitcoin investors plenty of extra money with which to gamble on altcoins. Furthermore, since coins like PEPE—up 121% this week—have lower market caps and are more thinly traded, it doesn’t take nearly as much buying power to send them to the moon.
While outflows from Bitcoin into altcoins may seem like a damper for Bitcoin’s diehard HODLers, Hougan doesn’t think the trend will result in an early end to the crypto bull run. After all, Bitcoin has an all-new source of massive, persistent demand in the form of ETFs, which can keep the “wealth effect” going for a long time.
“The result is more of an 'everything season' than a classic 'alts season,'" he wrote. "That's what we're seeing in the market and I suspect it will continue."
Edited by Andrew Hayward