Crypto is a very cyclical market, but it’s not just the (roughly) 4-year Bitcoin cycles that you need to keep in mind. In fact, the way that money moves within crypto is much more important, and I’d say that it’s even easier to time and use in your trading. Bitcoin’s cycles are very long-term, and they can definitely be useful for your investment strategy, but they don’t tell you that much about what positions to take on a time horizon of days or even weeks. Cycles within crypto — how capital tends to rotate through different sectors of the market — can offer you much more info to take many more trades. That said, there are different levels to watch out for, so I’ll start by covering the longer-term cycles before I get to some shorter-term (harder to predict but potentially much more profitable) capital flows.
First of all, it’s important to understand why cycles happen in the first place. Typically, it all starts with Bitcoin running hard and fast: this is the first phase, as money moves from fiat (including stablecoins) to Bitcoin. This can accelerate and become parabolic very quickly, as more and more investors start piling in to avoid missing the run (the smartest players are the ones that already bought before the massive expansion, since they know that more buyers are coming). In this phase, alts don’t perform that well, and here it’s vital to look at alt/BTC (not just alt/USD) charts. Some alts will often rise slowly or remain stable in dollar value, but most will have a sharp drop in BTC value. So, even if your alt goes up by 5%, you’re still making a bad decision to hold it when BTC is making 20% moves in the same period.
During this first phase, many investors are selling their altcoin bags to move money into Bitcoin, but those alts can be somewhat propped up if they’re paired with BTC on large and liquid markets. Basically: if BTC goes up, it will have a slight upward effect on any alt that has a BTC pair, since the implied dollar value for a specific alt/BTC price will be higher as the price of BTC goes up. More often than not, this is not enough to outpace selling, and Bitcoin remains the undisputed star of the show.
At some point though, BTC slows down. It starts giving lower returns and, eventually, investors want to put their money elsewhere. Since they’ve just made a ton of profit with BTC, they’re also willing to take on more risk, and this is when they start moving into large market cap altcoins. Normally, Ethereum will start to outperform Bitcoin at this point, which is why the ETH/BTC chart is one of the best altseason indicators out there. But those large caps, too, will slow down at some point, and you can probably already guess where that money is going next: higher risk, higher reward mid caps and then low caps.
When risk appetite becomes ridiculously high, that’s when you see peak altseason euphoria: everything is pumping left and right — even low cap tokens that have been abandoned since 2018 can pump, as everyone that got sidelined on the BTC and large cap moves wants to grab their chance at a quick 5x or 10x. But this is when you need to be maximally cautious, rather than giving in to euphoria. When you feel that everyone is behaving recklessly and every single market seems to be getting sent, that’s when a crash is imminent. The smart money has already exited in the earlier phases, and the only market participants that are left completely exposed are reckless speculators chasing high returns in a dangerous game of musical chairs. At some point, the music will stop.
In this last phase, money moves away from the small caps to BTC and fiat and the cycle is ready to start again. But notice how I didn’t give you any specific timeline in terms of how long this lasts (either in terms of individual phases or the entire cycle). It’s not that I forgot — I left this out for a very important reason. The thing is, a lot of people view cycles as periods with a fixed duration: BTC is bullish for a specific number of months, then it takes another fixed period for alts to take over etc.. That, however, is the wrong way to look at it, for two important reasons: first, these phases can vary in length from cycle to cycle; second — and this is the crucial bit — these money flow cycles don’t just happen on one level. Just like there are primary, secondary and minor trends in the market (you can have a 1H downtrend within a 1D uptrend), the same thing works for money flows.
When BTC shoots up with a few huge green hourly candles, alts will in most cases take a breather and either stagnate or drop a bit. Then, as soon as BTC finds resistance and calms down, alts will start to go up, and you can observe this — the same cycle that you can see on much higher timeframes — even on the hourly chart. Always keep this in mind and, if you play it right, you can find some high probability setups by taking the money flows into account.
Finally, another aspect of looking at money flows has to do with flows between different alts. As you’ve probably noticed, Layer 1 coins were insanely hyped in the past weeks, and it all started with Solana’s face-melting bull run. When this happens, the smart move is to find other coins that have a similar narrative (in the case of L1s: ATOM, DOT, AVAX etc.) and start to build positions there. In crypto, it’s narratives that drive altcoin runs more than anything else, and that’s why you need to stay up to date with what’s hyped up at the moment. Recently, it was L1s, but it’s only a matter of time before it’s DEX tokens, DeFi blue chips etc. When that time comes and when one of them starts performing ridiculously well, take a position in those that look bullish and undervalued. That might sound simple, but it’s all you need.