Near the euphoric part of a crypto upswing, capital sloshes from Bitcoin (BTC -5.69%) into altcoins, and green charts make even seasoned investors feel invincible. During these altcoin seasons or alt seasons, the balance of risk and return changes dramatically, at least for the few months that they're happening. If you play your cards right, it can be a profitable period, but they also tend to coincide with many temptations to do the wrong thing and lose money.
So let's take a look at what to buy during alt season, and then we'll examine an entire group of investments that you should probably avoid.
Image source: Getty Images.
Keep buying the long-term compounders
Altcoin season generally refers to stretches when most large altcoins outperform Bitcoin for roughly a quarter or less; the normal conditions in which this occurs are immediately after a powerful bull run by Bitcoin starts to lose steam.
One rule of thumb is that alt season is happening if 75% or more of the top 50 altcoins by market cap beat Bitcoin's performance during the prior three months. Alt seasons tend to occur late in the four-year crypto market cycle as optimism peaks and investors are willing to take on dramatically larger amounts of risk than before.
For long-term investors, the best move is to keep dollar-cost averaging (DCA) into the assets most likely to be around and relevant five to 10 years from now. That means continuing to accumulate Bitcoin, even as its price is rising or starting to cool down after a big run. Similarly, add Ethereum (ETH -6.53%) to the buy list, even if the alt season drives its price near or past its all-time highs.
The investment theses for these two coins are largely the same in an alt season as they are normally. Bitcoin's supply is capped at 21 million coins, and due to the halving, mining produces less and less supply, making holders the owners of an increasingly scarce and valuable asset. On the other hand, Ethereum's status as the home of decentralized finance (DeFi) and the premier smart contract chain will ensure that its ecosystem remains relevant and continues to grow for many years to come.
When you buy those coins during alt season, it is very possible that some of your purchases will end up being underwater once the market reverts to a more normal state, or potentially to a bear market. But, if you've set up a long-term DCA into both of them, it won't really matter because you will have many purchases at much lower prices, and your cost basis will be safely spread across all of the volatility and the calm periods. You're not going to be able to time the market, so automate the process and hold on tight even when it's tempting to sell.
Altcoin season is not the time buy altcoins
During alt season, prices across the board fly far above any fundamental value. And that's when many investors reach for yesterday's lagging coins at today's peak multiples. The problem is what tends to happen next.
After the season ends, most altcoins fall 80% to 95% from their euphoric levels, and a large fraction of them never reclaim their prior highs. Cycle histories and index data show this dynamic repeatedly.
Many altcoins go to the moon during alt season, only to collapse once it ends. Even if you happen to buy one of the long-term survivors, your investment could be underwater for years and years due to buying it at the peak. The key point here is that even a quality coin with good long-term prospects can be so outrageously overvalued during alt season that it becomes a bad investment.
Consider Cardano (ADA -16.15%) and Litecoin (LTC -24.99%) as cautionary examples.
Cardano peaked at about $3.09 in 2021, then later traded near 10% of that level during the subsequent bear phase, a decline of roughly 90%; if you had bought it during alt season, you'd almost certainly still be underwater. The same situation goes for Litecoin, not to mention many other altcoins.
So you shouldn't buy altcoins during alt season. But why do late-cycle altcoin buys disappoint so often?
First, alt season lifts nearly everything, so price signals get noisy just as narratives get the loudest. Second, survivors change every market cycle. Features that sounded differentiating last time often get eclipsed by newer designs that implement the same concepts more effectively.
In practice, that means you can be directionally right about a crypto's long-term promise and still lose money buying the wrong things at the wrong part of the cycle. If you insist on adding to your positions in smaller coins during altcoin season, use conservative sizing, and be honest about the probabilities of success.
But for many investors, the much better move during alt season is to keep adding to Bitcoin and Ethereum on a set schedule, and prepare for being around for the next phase of the market, no matter what it is.
