The fluctuations of altcoins are mainly observed by selecting several larger market cap leaders such as ETH/BNB/XRP/LINK to analyze their performance across the four phases of BTC's previous market cycle.
Phase 1 (upward phase): August 2020 - April 2021
This bull market is fundamentally driven by the quantitative easing policies of global central banks (especially the Federal Reserve), which clearly maintained low interest rates until 2023, with QE continuing to purchase $120 billion in bonds each month. The Federal Reserve also indicated it would allow inflation to 'moderately exceed' targets.
Meanwhile, U.S. tech stocks showed strong profitability, with Apple reporting over $100 billion in revenue for Q4 2020; Amazon's cloud services and e-commerce business exploded, with annual growth exceeding 40%; Tesla continued to be profitable, pushing its market value to nearly $100 billion; Facebook and Google experienced a strong rebound in digital advertising. The profitability of tech giants reinforced the investment philosophy of 'future value,' leading to significant capital embracing 'decentralized technology,' with leveraged assets becoming prevalent, a surge in derivative trading, and borrowing for mining emerging, resulting in a DeFi explosion. The concept of BTC as digital gold was accepted, transitioning from a 'speculative coin' to an 'institutional-grade asset,' with institutions like PayPal/MicroStrategy/Tesla buying BTC, greatly enhancing market confidence, while retail investors formed a chasing rally effect, further heating up the bull market.
At that time, the supply-demand relationship in the crypto industry also changed;
1. Technological upgrades and deflation expectations: For instance, the EIP-1559 proposal for ETH introduced a deflationary mechanism, while BNB increased its burn rate due to the expansion of the BSC ecosystem, resulting in supply-demand imbalances that pushed prices higher. SOL rapidly rose due to high TPS and ecosystem projects (like Serum).
2. Ecosystem expansion demand: The DeFi explosion significantly increased the actual usage demand for tokens like ETH and LINK (e.g., staking, gas fees), driving value growth.
3. Event catalysts: XRP rebounded by 721% due to the SEC lawsuit pause and cross-border payment cooperation, indicating short-term explosive power from reduced legal risks.
In this round of increases, different tokens exhibited their common and differential rules within the market time cycle;
Common rules: Macro economy and liquidity drives are the core forces behind the rise of all risk assets.
Differentiating rules: BTC, as a 'benchmark asset,' has its stability, with the lowest rise (550%), but greater stability; small-cap tokens like BNB (2578%), SOL (1321%), and ETH (322%) have higher gains but longer cycles and are more dependent on specific ecosystem events.
Phase 2 (correction phase): April 2021 - July 2021
The core reason for this round of adjustment is a series of reactions triggered by the surge in short-term macro data leading to inflation concerns; the CPI data for May and June 2021 were 5.0% and 5.4%, far exceeding the 2% target. The FOMO meeting in June 2021 first released hawkish signals, with the dot plot indicating potential rate hikes in 2023. The market worried about the Federal Reserve tightening liquidity, leading to adjustments in risk asset valuations as market funds began to withdraw, with M2 growth slowing from a year-on-year growth rate of 25% down to around 10%. At the same time, U.S. tech stocks reported earnings in Q2 2021, showing continued earnings growth, but some companies exhibited signs of 'slowing growth.' Institutional funds began to adopt a wait-and-see approach.
The crypto industry, as an emerging sector, also faced shocks from regulatory policies;
1. China's mining ban (BTC): China's ban on cryptocurrency mining led to a sharp decline in computing power, exacerbating market panic and resulting in a 55% drop in BTC sales.
2. SEC lawsuit pressure (XRP): The SEC's legal action against Ripple directly triggered a liquidity crisis for XRP, leading to a 74% drop.
3. Multi-country regulatory investigations (BNB): Binance faces anti-money laundering investigations in multiple countries, exposing risks of centralized exchanges, causing BNB to plummet by 69%.
Industry technology and supply-demand have become unbalanced;
1. Short-term bearish impact from technological upgrades (SOL): Network congestion issues arose during mainnet optimization, compounded by institutional selling, leading to a 68% drop within 7 days.
2. Gas fee conflicts (ETH): High gas fees suppressed user participation, weakening the attractiveness of the ETH network and accelerating price corrections.
3. Technical standard disputes (ETH): Disagreements over the EIP-1559 proposal exposed governance contradictions within the community, and policy implementation resistance led to a 60% drop in ETH.
4. Demand-side contraction (LINK): With the decline in DeFi popularity, demand for oracles decreased, leading LINK to drop by 74% due to its strong ecosystem dependency.
During this phase, different tokens in the cryptocurrency market also experienced differentiation amidst liquidity shortages. BTC and BNB had long adjustment cycles (97 days), reflecting market hesitance towards major assets in the absence of liquidity, while SOL's short-term plunge (7 days) reflected the higher volatility of emerging assets under funding shortages.
The rules of the cryptocurrency market during this phase;
Common rules: ① Macroeconomic policies (inflation, interest rate hikes) are prerequisites, while political events (regulation, lawsuits) are the catalysts for price crashes; in the absence of liquidity, asset prices generally shrink and cannot achieve independent rises based solely on fundamentals; ② In Fibonacci retracement levels, most tokens fell to key Fibonacci levels (e.g., BTC/BNB at 0.618, XRP/LINK at 0.786), reflecting the commonality of technical pullbacks in anchoring psychological responses during panic.
Differentiating rules: The extent of declines is negatively correlated with liquidity: BTC, with high liquidity (-55%), saw the smallest decline, while XRP, with poor liquidity (-74%), saw the largest decline.
Phase 3 (2nd wave increase): July 2021 - November 2021
This cycle belongs to the resonance of macro instability & runaway inflation → Federal Reserve's 'mild taper' → Institutional-led recovery → Confirmation of BTC's mainstream status → New highs.
Faced with high inflation and a slowing job market, Powell's mild remarks at the Jackson Hole annual meeting in August 2021 did not specify the timing of tapering, becoming a point where the market believed the bearish news had been fully priced in. At that time, the macroeconomic Q2 GDP was 6.7%, slowing to 2.1% in Q3, primarily affected by supply chain shocks. Although M2 showed marginal contraction, it remained at a high level; Q3 technology stock earnings reports were also strong, with Apple’s revenue continuing to perform well, Google’s ad revenue surging, and Q3 net profit up 68% year-on-year. Microsoft’s cloud services reached record profits, and Tesla's net profit soared by 389% with record deliveries. The strength of tech earnings revived risk appetite; based on this, in October 2021, ProShares launched the first Bitcoin futures ETF (BITO). Although liquidity was marginally contracting, the ETF drove institutional interest, with ARK, SkyBridge, and others continuing to build positions, resulting in structural inflows into BTC, warming up sentiment in the crypto market, with DeFi and NFT trends driving Ethereum upward.
The crypto ecosystem expanded during this phase, forming an internal circulation.
① The Taproot upgrade for BTC: Enhancing privacy features may indirectly alleviate regulatory concerns about transparency, promoting institutional accumulation (ARK, Grayscale).
② Compliance of the BNB chain ecosystem: The PancakeSwap-dominated ecosystem expansion needs to operate within the regulatory framework of multiple countries to avoid repeating past 'regulatory investigation' pitfalls.
③ Platform coins like ETH were driven by increased trading demand due to DeFi/NFT activity;
④ Emerging chains like SOL became hotspots due to ecosystem explosions (Degenerate Ape, FTX), with capital rotation driving prices soaring.
⑤ Cross-chain collaborations expanded demand (LINK): Collaborations with Polygon and Avalanche enhanced the use cases for oracles, driving LINK up by 186%.
The market rules of this phase:
Common rules: A loose environment providing liquidity is fundamental, while technological breakthroughs like Taproot and London upgrades opened up valuation space.
Differentiating rules: In this phase, event-driven investments became the core logic, shifting investment logic from 'speculating on coins' to 'speculating on events' and 'speculating on ecosystems.' However, different projects have different positions in market logic: BTC/ETH are conservative, SOL/BNB are growth-oriented, XRP is policy-driven, and LINK is ecosystem-focused.
Phase 4 (downward trend): November 2021 - June 2022
This round of severe declines is the result of the resonance of 'macro liquidity contraction + regulatory pressure + black swan events.'
U.S. CPI rose from 6% to 8.6%, continuing to climb, while the unemployment rate dropped. Q1 2022 GDP began to slow, raising concerns about recession signs. In November 2021, the Federal Reserve hinted at accelerating tapering, with an official interest rate hike of 25bps in March and 50bps in May, along with balance sheet reduction, leading to substantial tightening of liquidity. At the same time, EPS forecasts for U.S. tech stocks were downgraded, with companies like META and Netflix facing significant losses. The series of effects from liquidity tightening led to excessively high market asset costs, prompting institutional investors to pull back their funds, with the VIX panic index breaking above 35, and risk-averse sentiment spreading into the cryptocurrency sector. The Grayscale BTC Trust (GBTC) premium turned negative, and MicroStrategy's holdings faced losses exceeding 50%, with institutional selling accelerating the downturn.
Under the premise of macro liquidity contraction, the crypto narrative failed, accelerating the ecological crisis.
① The collapse of LUNA/UST triggered a chain reaction, causing a trust crisis throughout the DeFi system.
② The DeFi ecosystem was burdened by liquidation risks and TVL loss, with significant declines in activity for projects like Uniswap and Aave.
③ The delay in the ETH merger caused market expectations to fall short, leading to a short-term lack of positive narratives.
④ The SOL ecosystem collapsed, with the FTX crash and concentrated selling by large holders triggering a 'panic sell-off.'
The rules of the market during this phase.
Common rules: Liquidity is king; the contraction of global dollar liquidity is the core driver of declines; the decline of tokens is positively correlated with liquidity sensitivity (e.g., SOL > BTC); the decline's Fibonacci retracement levels are mostly at 0.786/0.886, typical technical support levels in bear markets, reflecting the consensus of technical analysis in the market.
Differentiating rules: The dependence on ecosystems determines the extent of declines; LINK (TVL shrinkage) and SOL (FTX correlation) saw significant declines due to their ecosystem singularity, while BTC, as the main asset, showed greater resilience than other tokens.
From the different token fluctuations across the four phases of the entire cycle, we can conclude that;
1. The robustness of the macroeconomy is a major prerequisite, while a loose monetary policy providing ample liquidity is a necessary condition. Corporate profitability is a determinative propeller, ultimately enabling substantial capital to enter risk assets.
2. In the 'good economy + loose policies + rising profits' golden window, market liquidity funds prefer assets with 'high growth, high volatility, high elasticity,' with innovative and high early growth expectations, where cryptocurrencies (especially BTC) are among the most representative ultra-high Beta assets.
3. Under the aforementioned unfavorable conditions, any emerging industry would experience a narrative failure, as the lack of liquidity could not achieve an independent market driven solely by positive fundamentals.
