Since November 1, altcoins have grown enormously in the crypto market, with gains reaching 99.31%. This has sparked speculation about the start of altcoin season—a bull rally of sorts. This comes particularly as Bitcoin’s dominance has declined over the last month, raising fears about volatility.
The crypto market is always unpredictable and volatile. An intriguing phenomenon that many investors have observed is that the value of many altcoins decreases when the price of Bitcoin (BTC) increases.
Donald Trump’s recent victory in the U.S. presidential election has resulted in major upside for the altcoin market. However, some market analysts have expressed concern that the current rally may be temporary.
Why is the Altcoin bull rally threatening volatility?
Liquidity flow is the most significant factor contributing to the current market environment. This is why the majority of altcoins are traded against the BTC pair on exchanges.
This induces traders to dispose of altcoins to acquire Bitcoin, thereby capitalizing on its expansion. As a result of their decline, the value of these altcoins decreases.
According to on-chain data, speculators who use leverage are incurring annualized expenses of 48% to 72% to sustain their positions.
In an uptrend, these costs may not appear to be prohibitive; however, if the market stabilizes or experiences a decline, they could result in forced liquidations or sell-offs.
One analyst cautions that these circumstances are similar to those that occurred in late 2021 when coins such as XRP and Solana experienced rapid corrections following lengthy rallies.
According to the analyst, traders may continue to exhibit irrationality. However, he said, “We are at the point where teams and VCs start clipping more aggressively.”
He observes that financing rates exceeding 100% annually indicate an increase in risk in a market that is already characterized by increased leverage and declining spot trading volumes.
According to Sergei Gorev from YouHodler, these coins are not to blame. He explained that the rise of Bitcoin above $100,000 has had even more of an effect on the market. Sergei added that because Bitcoin is linked to the S&P 500, its changes could have an effect on the whole crypto market.
He went further to say that divergences in technical charts and the rising value of the US dollar are signs that the rise might not last. In the past, round-number milestones for Bitcoin have caused times of higher volatility, which has added to the uncertainty.
Although these concerns persist, there is still considerable optimism regarding the altcoin market. Some traders contend that the present circumstances could result in a long-term bull market, while others believe that historical trends and the increasing cost of funding indicate a potential decline.
It is evident that the market is currently unpredictable, as evidenced by the ongoing divergence of opinions.
Is the alt season over?
In a December 5 “Volatility Review” report, Bybit observed that Ethereum has outperformed Bitcoin since the US elections. The report observed that traders are beginning to adjust their preferences toward ETH, as evidenced by the significant shift in the ETH/BTC ratio.
The ratio increased from a minimum of 0.31 on November 19 to over 0.4 on Friday. Additionally, the decline in Bitcoin’s dominance has been attributed to ETH’s outperformance against Bitcoin, which has sparked speculation about the onset of an altcoin season.
Also, yesterday, an altcoin called Monero (XMR) was trading at $201.75 and experienced a 2% increase. The price, however, has gone down to $198.19.
Both Bitcoin and altcoins are experiencing market stagnation. As the days approach Trump’s inauguration, one of the two could eventually become bullish.
Why is there such an inverse relationship between Bitcoin and altcoins?
One is Bitcoin dominance. When Bitcoin climbs in price, investors go from altcoins to Bitcoin, a more reliable investment tool. Bitcoin’s market value rises, leading altcoins to fall.
The market sentiment also causes the inverse. Bitcoin typically sets crypto trends. Bitcoin spikes are usually good for the market. Investors choose Bitcoin over lesser-known altcoins in this era. This reduces altcoin capital flows.
In addition, market manipulation equally causes the inverse. The Bitcoin market is volatile. Big investors (called “whales”) may pump and dump altcoin values. When Bitcoin rises, these people may sell altcoins to buy more Bitcoin, causing market instability.
FOMO is also a major reason. When Bitcoin prices rise, the FOMO effect pushes investors to put more money into it. They worry about missing out on this growing trend, reducing cryptocurrency investment and value.
Despite popular belief, cryptocurrencies do not necessarily follow Bitcoin’s trajectory. Certain events or news about Bitcoin can raise its price without boosting altcoins, causing a price gap. This is called a lack of correlation.
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Source: https://www.cryptopolitan.com/altcoin-bull-run-threatens-market-volatility/