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, the original author: Rekt Capital, compiled by Odaily translator Katie Ku.
Fund rotation in the cryptocurrency market is cyclical.
The way funds flow is actually affected by human psychological factors. The degree of rationality of crypto market participants determines the predictability of the cryptocurrency flow cycle. An in-depth analysis of the capital rotation cycle will help grasp investment opportunities.
Below, we will discuss the changes in investors mentality during the cryptocurrency rotation process, and the impact of the rotation process on cryptocurrency investment and diversified investment. Among them, mainly include:
Fund rotation in the crypto market;
Cyclic Analysis of Small Money Flows in 2020.
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How funds rotate in the cryptocurrency marketFiat currency is the first type of funds in the cryptocurrency fund rotation cycle. Whether its dollars, pounds or euros, cash is the first step to start investing in cryptocurrencies.
Bitcoin:Bitcoin:
The classic cryptocurrency investment is to invest in bitcoin, and when investors buy bitcoin, its price rises. When the price of Bitcoin rises, investors who have tasted the sweetness want more returns. After that, investors will swing between the choices of continue to buy more Bitcoin, redistribute assets and explore more cryptocurrency Altcoins.Large-cap stock tokens (or mainstream currencies, such as Ethereum, which is one of the dominant players):
When Bitcoin began to show an upward trend, investors pursued high returns on cryptocurrency investments. Thats why you choose to diversify your assets, such as buying tokens such as ETH. Among the alternatives to Bitcoin, Ethereum is the most well-known and often the best choice for diversifying investment portfolios. At present, the total market capitalization of Ethereum is still behind Bitcoin. In theory, the risk of investing in Ethereum is higher than that of Bitcoin, but on the other hand, the annual income of investing in Ethereum is also higher than that of Bitcoin.Mid-cap tokens (mostly some ERC20 tokens):
Many token projects built on Ethereum see Ethereum as a sign of increasing value for other smaller tokens. When the price of ETH rises, the prices of other small tokens also rise in unison. However, these tokens are not well known in the crypto market, so there is not much interest from investors. Therefore, aside from Bitcoin, the total market value of other tokens is less than that of Ethereum. A scenario in which mid-cap tokens collectively rise compared to large-cap tokens like Ethereum will have the potential to outperform large-cap tokens, and when they simultaneously risk more than large-cap tokens, the investment gains The returns are also higher.Small-cap tokens (commonly known as altcoins):
When the upward trend of returns becomes more attractive, investors risk appetite also increases. When investors have no other currency to turn a profit on, small-cap tokens will be the last resort in the cryptocurrency rotation cycle. In fact, many investors will sell at this point to make a profit, securing their investment in Bitcoin (if there is a trading pair of token and BTC) or fiat currency (if there is a trading pair of trading token and USD) Dont lose money on it.
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Return bitcoin or sell legal currency
As small-cap tokens grow exponentially (giving investors a return on their initial investment that multiplies in value in the process), money flows back into bitcoin or fiat.
If investors’ capital flows into fiat currency, the regulation mechanism of the cryptocurrency market may be activated. Because during this cycle, investors guarantee their returns and completely avoid the risk of investing in cryptocurrencies, which can lead to a sharp drop in asset prices.
The rotation cycle of cryptocurrency in 2020 is an enlarged version of the rotation cycle of small funds, and it is also the focus of this article.
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2020 Cryptocurrency Rotation Cycle
The 2020 cryptocurrency rotation cycle reflects the reshuffling of the crypto market caused by the epidemic-induced sell-off in mid-March.
Cash-strapped investors panic-sold their assets during the market turmoil to shore up their cash as they prepared for an unknown, highly contagious virus that at the time put the world in lockdown.
After a sharp pullback, bargain hunters started hoarding Bitcoin at the lows and happened to be the first movers to start a new Bitcoin bull cycle. Every cryptocurrency flow cycle begins when investors buy Bitcoin.
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Money Flow Stages: Bitcoin to Ethereum
Once Bitcoin falls to the bottom after the sell-off in March, it also means that a new bull market for Bitcoin is coming.
That said, new uptrends don’t last forever, which is why Bitcoin often enters sideways phases before making new local highs.
But it is during this period of flat market prices that investors become more confident in diversifying their portfolios into tokens. After reaping some gains from the Bitcoin uptrend, they are more willing to take on additional risk and put some money into large-cap tokens like ETH.
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price analysis
price analysis
Price stabilization stage 1:
During Bitcoin’s first brief sideways price movement, its price action plateaued between April 6 and April 20, while ETH plateaued between April 20 and May 25.
While Bitcoin was just forming a sideways price movement during the week of April 6, ETH actually took a good chance at rising prices. In fact, ETH has been on the rise during the Bitcoin price plateau from April 6 to April 20.
There is a close relationship between Bitcoin and Ethereum. Bitcoin leads the market, with ETH not far behind.
Price stabilization stage 2:
But the price of Bitcoin stopped moving sideways during the week of April 20th, while ETH started to move sideways in price.
Bitcoin had a two-week winning streak before forming a 12-week sideways range from April 27 to July 20.
While Bitcoin plateaued in this extended 12-week range, ETH also stabilized for a while during the week of May 25 before jumping into a new price plateau.
Price stabilization stage 3:
Interestingly, during the week of July 20, both Bitcoin and Ethereum broke out of their third sideways ranges at the same time.
Not only has the price appreciation of Ethereum been significantly greater than that of Bitcoin, but the breakout of the range on July 20, 2020 was synchronized for the first time.
Arguably, DeFi-based hype reached a fever pitch at the time, giving an extra impetus to Ethereum’s rally as ETH became increasingly correlated with Bitcoin. Ethereum is no longer lagging behind Bitcoin; subsequent gains have even led to a short-lived positive in the market.
Shortly after the Bitcoin range breakout on July 20, Bitcoin formed a third sideways price range on Aug. 3. Meanwhile, ETH continued to rise, catching up with Bitcoin’s momentum, eventually reaching its own price range on Aug. 10.
Both Bitcoin and Ethereum went through several weeks of flat prices, which eventually turned into a period of stable price distribution, rather than the previous price drops and spikes.
Both Bitcoin and Ethereum experienced sharp declines in the same week on August 31, but they are still closely correlated.
Summary of the three price stabilization stages:
These three sideways volatility phases show how Bitcoin leads the market in the money flow cycle, while ETH’s data follows a large increase in Bitcoin’s price.
Every time Bitcoin goes up, the flow of money from investors is clearly going to Bitcoin.
As long as the price of Bitcoin is flat, money will flow into Ethereum (i.e. large-cap tokens). ETH’s price action lagged behind Bitcoin’s but eventually caught up a few weeks later.
The first three bullet points illustrate how the initial phase of the money flow cycle occurs (i.e. money flows from fiat to Bitcoin, and from Bitcoin to large-cap tokens, primarily Ethereum). However, the main points to explain the later stages of the money flow cycle. Specifically, how money is flowing from large-cap tokens like Ethereum to mid- and small-cap tokens. Because when Ethereum manages to keep up with Bitcoin’s price movement and form its own price range, Ethereum becomes a benchmark for predictions in the token market, especially for mid- and small-cap tokens.
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Fund Flow Stage: Ethereum to Mid and Small Cap Tokens
What Happens to Small-Cap Tokens When ETH Prices Flat?
The market capitalization of small-cap tokens has surged.
During periods of flat bitcoin and ethereum prices, investors put money into tokens with increasingly low circulation.
Driven by ambition, they will take the benefits of combining small-cap tokens to keep the income cycle. At the same time, their appetite for risk increases, as these tokens tend to be riskier and very volatile assets.
But investors arent just driven by money in the yield cycle. It’s no coincidence that funds are flowing out of large-cap tokens like Bitcoin and Ethereum when they converge in price. Investors feel unchallenged when bitcoin and ethereum prices move in a similar direction and try to make waves in the market when small-cap coins are trending exponentially higher.
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So, how can we understand the upside of small-cap tokens?
A coin’s dominance of the market is a valid indicator of its overall growth as a coin’s valuation in the cryptocurrency market.
Essentially, token dominance represents the ratio of token investment to the total amount of money in the entire cryptocurrency market.
While Bitcoin and Ethereum price trends are converging, token valuations grow exponentially with money flow cycles.
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Lets Compare Bitcoin and Ethereum Volatility vs Coin Dominance Changes
We analyze through the price trend of Ethereum. After all, Ethereum, whose price fluctuates sideways, is what makes smaller coins go up in price.
ETH price stabilization phase 1:
When Bitcoin surged on April 20, Ethereum was just starting to form its price range. But the token’s dominance suggests that mid- to small-cap token valuations are sizable. After all, the dominance of the coin dropped by a few percentage points.
The reason for this is that tokens generally underperform when Bitcoin is rising. Investors re-allocated assets, bought in the rising trend of Bitcoin, and sold tokens in panic. Funds flow back into Bitcoin briefly.
The coin’s valuation continued to drop until May 11th, which was an important turning point in the expansion of the coin’s market.
ETH price stabilization phase 2:
May 11th was a pivotal moment for the token market, as that was the sign that token valuations entered a new upward trend. And maintained an uninterrupted upward momentum until July 20.
Note the steady increase in the tokens valuation on May 11th and July 20th. After an initial exponential uptrend, both bitcoin and ether have experienced a long period of converging price action. When the price fluctuations of Bitcoin and Ethereum converged, investors funds obviously flowed into small and medium-sized currencies.
Other key points:
During the week of May 25, Ethereum broke out of the price range it had been holding. It is during this time that the flow of funds is concentrated in the big coins, mainly ETH.
But once Ethereum firmly established its price base in the June 1-July 20 range (i.e. ETH’s price plateau 2), the token’s status began to surge again until July 20.
The coin’s dominance declined slightly during the week of July 20. Both bitcoin and ethereum were soaring at the time, with investor funds briefly flowing out of the smaller altcoin to catch the uptrend in both bitcoin and ethereum.
ETH price stabilization phase 3:
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Summarize
Summarize
Since the crash in mid-March 2020, Bitcoin has experienced a new bull market. And during its uptrend, ETH followed suit. Especially during the period of Bitcoin price convergence, Ethereum was able to shorten the price gap between Bitcoin and catch up, and finally formed its own price fluctuation range. It was during periods of price stability for Ether that ETH became an indicator for the token market, facilitating capital inflows into small-cap tokens. When Bitcoin broke out of the sideways price range, Ethereum initially struggled to catch up, but later succeeded and Ethereum also skyrocketed, both setting the stage for another cycle of micromoney flows.
In the three-side analysis of the price fluctuations of Bitcoin and Ethereum, each of them shows a microscopic capital flow cycle, that is, funds will flow from Bitcoin to Ethereum (that is, a large currency), to small and medium-sized currencies, and then Go back to Bitcoin and start the cycle again.
