During the first three months of 2024, crypto traders have been utterly transfixed by the drama of Bitcoin (BTC -1.40%) decisively smashing through its former all-time-high of $69,000. Now trading just north of $72,000, Bitcoin has the attention of all investors, who are wondering just how much higher it might go this year.
The good news is that any bull market rally for Bitcoin tends to lift the fortunes of all cryptocurrencies. It's a classic case of a rising tide lifting all boats, and that's exactly what seems to be happening now. Bitcoin may be up 70% for the year, but a growing number of cryptocurrencies are now up triple digits for the year. Let's take a closer look at why that's happening and how sustainable the rally in other cryptocurrencies might be.
Altcoin season
For crypto investors, one of the most highly anticipated periods of any sustained Bitcoin rally is known as "altcoin season." This is the time of the market cycle when low market cap (and often highly speculative) cryptocurrencies gain favor with investors and really take off. In fact, many of them can outperform Bitcoin during this period, and so there's a mad scramble at the outset to find the altcoins with the highest upside potential.
The only problem, of course, is that there is no universally accepted metric, statistic, or indicator to suggest when "altcoin season" has started. It's not like the start of Spring, for example, when everyone agrees that the vernal equinox is the official start of the season. Instead, crypto investors rely on a complicated set of signals to tell them when altcoin season has started.
Bitcoin dominance
One of the most important of these signals is known as Bitcoin dominance. To calculate this value, all you do is take Bitcoin's market cap and divide it by the total market cap of the crypto market. This will tell you how "dominant" Bitcoin is at any point in time. Generally speaking, Bitcoin dominance will rise anytime Bitcoin is soaring in price and fall anytime Bitcoin is declining in price. If you check out the TradingView chart below, it's easy to see how Bitcoin dominance has been on the rise since late 2022.
Market Cap BTC Dominance, % chart by TradingView
Bitcoin now accounts for nearly 55% of total crypto market cap, up from 40% in November 2022. This makes a lot of sense, right? Bitcoin skyrocketed by 150% last year and is up 70% this year. As a result, Bitcoin's market cap is surging, and it is becoming more dominant.
However, if Bitcoin dominance rises too high, then the market will typically adjust, and investors will start to cycle into other cryptos. Some do it for portfolio diversification purposes. Some do it to lock in their profits on Bitcoin. And others do it out of pure greed: whenever they see that the price of Bitcoin is starting to stabilize at a certain level, they start to seek out higher returns elsewhere.
Altcoins to watch
Given that Bitcoin dominance nearly reached 70% during the last Bitcoin bull market, and we're only at 55% right now, we might still have time before the official start of altcoin season. However, if you think altcoin season is going to start early this year, the big question becomes: Which cryptos are most likely to benefit?
Image source: Getty Images.
Thus far in 2024, the answer has been AI crypto tokens. Given all the hype around Nvidia, artificial intelligence, and ChatGPT, any crypto token even tangentially related to AI seems to be up triple digits for the year. For example, Fetch.ai (FET 11.60%) is up 300% in just the past two months.
As altcoin season expands, it's only natural that investors will seek to widen their nets. Some will look for cryptocurrencies most likely to get their own spot ETFs, just like Bitcoin. This is a relatively limited set of cryptos, so others will look for hot tech sectors ready to explode. For example, some investors think that quantum computing has the potential to become the next AI. If so, it means that any crypto tokens related to quantum computing could take off.
Just buy Bitcoin?
That being said, things can get incredibly dicey once you start diversifying beyond Bitcoin. Historically, altcoin season in the crypto market becomes so speculative, so frothy, and so filled with the fear of missing out (FOMO) that the whole thing collapses. That's exactly what we saw with the last crypto bull market rally, and it wouldn't surprise me if the same thing happens again within the next 24 months.
So, for now, the best option might just be to make Bitcoin the centerpiece of your crypto portfolio. For added diversification, you can invest in large market cap cryptocurrencies such as Ethereum (ETH -2.58%) that have stood the test of time. Sure, you might give up some short-term gains by not investing in more speculative low cap crypto tokens, but you can also sleep a lot easier at night. What matters is your performance over the long haul, not during a particular season of the year.
Dominic Basulto has positions in Bitcoin and Ethereum. The Motley Fool has positions in and recommends Bitcoin, Ethereum, Fetch, and Nvidia. The Motley Fool has a disclosure policy.
