Altcoins: Risk-On

Level 3 - Virgin DeFi Analyst

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Crypto markets are absolutely ripping. Today, we’ll go over a framework you can use for altcoin risk-on periods to juice portfolio returns and manage risk.

The Basics

This is for people new to crypto in their first cycle.

An altcoin is simply a crypto token. Often times there is an underlying protocol, application, or other type of crypto project involved. Memecoins (altcoins with no underlying value) have also become a larger part of crypto in recent years. Typically, these tokens are transferrable and tradeable. Onchain coins make use of liquidity pools to enable trading, and some portion of these coins get listed on exchanges either as a result of scale/volume or simply paying the exchange for listing.

The basic framework to understand for altcoins is the following:

1. Altcoins are high-beta assets (upside and downside is amplified)

2. Large moves in BTC result in “risk-on” periods where altcoins outperform

3. There are altcoins that exhibit periods of relative strength and weakness to Bitcoin, driven by a coin’s narrative and supply/demand dynamics

4. Many times, altcoins can be picked up at ground floor valuations or even for “free” via airdrop farming

5. The value proposition of altcoins is increased volatility, asymmetry, and taking advantage of forced participation (crypto VCs and hedge funds who have to buy/support projects or VCs who have to sell to generate cash returns)

Correlation Dynamics

Historically, most altcoins are positively correlated with Bitcoin’s price direction. Large cap alts exhibit high correlation coefficients with BTC (0.7-0.95), meaning they move in the same direction as Bitcoin most of the time. When BTC rallies, it creates a rising tide that lifts the broader crypto market.

Correlation doesn’t capture the timing and magnitude differences that are crucial for profiting from altcoin cycles. Bitcoin dominance rises over the course of a crypto cycle, with many altcoins underperforming simply buying Bitcoin. As the cycle matures, profits rotate into altcoins.

The psychology behind this is fairly intuitive — participants who miss the BTC rally want to chase higher returns to “catch up”, and participants who captured the BTC rally have a pile of profits to redeploy in higher risk/reward coins. Institutional players who have captured the meat of the BTC move chase these opportunities in a search for higher returns as BTC matures.

The key point is that altcoin risk-on periods offer dramatically higher upside. In 2017, obscure altcoins rallied tens of thousands of percent from a speculative frenzy. In 2021, major Layer-1 protocol tokens like Solana skyrocketed 90×+ in value, far outpacing Bitcoin’s ~2× gain. Even in 2024 – a year where capital initially concentrated in BTC (partly due to institutional products and a pre-halving run-up) – certain segments like memecoins still achieved extreme returns, with the memecoin market cap jumping ~6.7× within the year. Bitcoin doubling in 2024 was impressive for a trillion-dollar asset, but the memecoin classic risk-on subset greatly exceeded that (Pepe +30,000% from launch, DOGE +251%, etc.). The consistent theme is that when the market turns “risk-on,” altcoins exhibit higher beta and asymmetry – smaller allocations can yield outsized gains.

Risk-On Signals in Alts

Timing can be hard if you are new to crypto. Here are some risk-on signals we look for in alt cycles:

1. Local peak in BTC dominance: After a major BTC run you want to see BTC’s share of total crypto market value decline and a broad uptick in altcoins (TOTAL3). Important: you want to see cooling momentum on BTC without signs of a broader downturn.

2. Large-cap alt strength: If a basket of major alts (e.g. ETH, SOL, SUI, etc.) start to outpace BTC this is a risk-on signal for alts.

3. Rising stablecoin supply: This can be a point of additional confluence that shows more cash is available to deploy. We would not consider this as a risk-on signal own its own (participants could be taking profits into stablecoins, a trend we expect to see more of in coming years).

4. Willingness to adopt speculative narratives: Risk-on periods mean popular categories like memecoins, extreme yield DeFi farms, and other onchain speculative “money games” experience increased participation. At its extreme, this can precede a local top. In the early stages, it is a revival of speculative capital.

5. On-chain usage spikes: Rising transaction counts, active wallets, TVL, and congestion indicates risk-on periods. As with point #4, this can precede a local top at extremes.

Note on ETHBTC Bottom

In our most recent Q&A for paid subscribers we pointed out that ETHBTC had bottomed. Today we’ll talk about how we came to this conclusion and what this means for Ethereum.

In 2024 we became increasingly bearish on ETH due to continued underperformance and a rise in credible competitors (Solana, Sui, Hyperliquid). With ETHBTC on constant decline, participants became far too comfortable shorting ETH. Meanwhile, the Ethereum Foundation and major ETH holders finally accepted shortcomings related to the chain and made plans to improve ETH.

However, our thesis for ETHBTC bottoming had little to do with underlying fundamentals. Our view was simply that ETH was oversold. Being an ETH critic had reached the mainstream (public figures such as Kevin O’Leary were on the news saying ETH was not worth buying over Bitcoin) and crypto native participants had become complacent, consistently shorting ETH on every bounce.

Chart: ETHUSD | Traders will often have their stop losses or liquidation levels above key breakdown points such as the ones shown above. In a trend reversal, these positions become vulnerable. As price eats through these stops/liquidations, moves become violent as thsee forced buyers are pushed into the market.

Meanwhile, ETHBTC reached levels not seen since early 2020. It’s hard to argue that the adoption of Ethereum is worse today than it was in January 2020. These factors combined to create a setup for a gargantuan short squeeze, the results of which you have seen play out over the course of the last few weeks. Since price is the best narrative, this can result in a trend reversal and a continued period of ETH outperformance.

ETH’s outperformance is on the back of a weakening case for Solana as interest in the memecoin casino has declined significantly. For example, a new memecoin was launched a few weeks ago called GORK. GORK is an “AI” Twitter account made as a parody of Grok, Twitter’s AI. Elon Musk followed the GORK account, changed his profile picture to GORK, and interacted with the account in front of hundreds of millions of followers. GORK’s highest market cap was ~$80 million. This stands in stark contrast to PNUT, the last memecoin Elon promoted which went to $1.5 billion within a week. While we don’t think it’s entirely over for the memecoin casino, it is not the dominant narrative today. However, we do expect highly speculative onchain alts to see a resurgence as larger caps approach peak valuations. Market participants tend to increase risk appetite as a cycle progresses due to a desire to catch up or to redeploy profits.

What’s Next

We expect a market pullback at some point in the coming weeks. After this pullback we will be looking at our list of altcoins to find outperformers. In our next post for paid subscribers on Tuesday we will be putting out a list of altcoins to watch, our reasoning for being interested in them, and how we envision trading/managing the coin.

If you haven’t already, sign up for our paid Substack to get access to this list along with additional posts every week.

Concluding Thoughts

Altcoin risk-on periods offer some of the most lucartive opportunities in the crypto asset class. For anyone interested in crypto beyond the technology, altcoins are arguably the biggest way to profit from crypto markets. By looking at market context and recent history, we can see that Bitcoin’s rally is a launchpad for altcoin outperformance. Every cycle people believe that altcoins will never outperform again, and every cycle they are proven wrong.

Remember, just like with ETHBTC, market participants become conditioned to behave a certain way as a pattern repeats itself. This conditioning is what creates the foundation for a trend reversal when the pattern no longer applies. Those who do not adapt quickly are forced to chase after the fact. Those who adapt too late become exit liquidity for informed market participants.

Until next time..

Disclaimer: None of this is to be deemed legal or financial advice of any kind. These are opinions from an anonymous group of cartoon animals with Wall Street and Software backgrounds.

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