Will the Fed Rate Cut Trigger Altcoin Season?

Key Points

• Bitcoin and Ethereum have driven a lot of this year's crypto market gains.

• We're unlikely to see another altcoin season like the ones in 2017 and 2021.

• Rate cuts and ETF approvals could boost altcoins with solid fundamentals.

• 10 stocks we like better than Bitcoin ›

The long-awaited interest rate cut has arrived, and with it hopes that crypto prices may soar again across the board. Bitcoin (CRYPTO: BTC), which has been creeping up all month, gained 2% in the hours after the announcement. Ethereum (CRYPTO: ETH) gained more than 3%.

But what about the smaller coins? Some of them are certainly doing well. As of Sept. 18, Avalanche (CRYPTO: AVAX) had gained almost 20% in a week and Binance Coin (CRYPTO: BNB) was up almost 9% in the same time period.

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Even so, one notable aspect of this year's crypto summer is that only Bitcoin, Ethereum, and a handful of other coins have seen significant inflows, leaving other projects out in the cold. Crypto enthusiasts hope the Federal Reserve rate cut and expected raft of spot crypto exchange-traded fund (ETF) approvals by the Securities and Exchange Commission (SEC) might be the boost altcoins need. Let's dive in and find out how realistic that might be.

What is altcoin season?

Altcoins are usually defined as any cryptocurrency that isn't Bitcoin. And altcoin season is a time when prices of smaller cryptocurrencies rise. It is usually marked by a drop in Bitcoin's dominance of the crypto market, shifts in consumer sentiment, and a spike in altcoin trading volume.

For example, in the 2017-2018 altcoin season, Bitcoin's share of the total market cap fell below 35% while altcoins topped 45%, according to CoinMarketCap data. Similarly, at points in 2021, altcoins and Bitcoin each accounted for about 40% of the cash in crypto.

We're a long way from that today. Bitcoin dominance is at almost 58%, with Ethereum at 13% and the rest of the altcoins at about 30%. The concentration of cash in Bitcoin has dropped slightly during the past month, but not enough to declare that altcoin season is upon us.

Altcoin season can be a time when some of those high-risk projects deliver strong returns. "Can" is the key word here -- many altcoins never get off the starting block and some fail completely.

Why altcoin season hasn't arrived yet

It's almost a year since the cryptocurrency market started to shake off its long crypto winter. The crypto market cap set a new high in August. But as we've seen, only a few cryptos are driving those gains.

That's partly because this bull run has been characterized by increasing institutional inflows and mainstream interest in cryptocurrencies and blockchain technology. So far, the SEC has only approved spot Bitcoin and Ethereum ETFs. Institutional investors are more interested in established projects and less willing to take risks on more speculative tokens and coins.

It isn't only institutional investors. Our research shows that if you had invested $200 in each of the top 20 altcoins during the last crypto boom four years ago, your portfolio would have been down about 30% as of a few weeks ago. Investors whose portfolios are still underwater may be more hesitant this time around.

Plus, the last altcoin season took place in 2021, when interest rates were low and an injection of pandemic stimulus cash made investors more willing to take risks. It's also worth noting that there are now many millions of cryptocurrencies out there compared with previous cryptocurrency bull runs. CoinMarketCap data shows there are more than 21 million cryptos now compared with less than 21,000 in 2021. It's still possible to find hidden crypto gems, but it's a lot harder.

Image source: Getty Images.

Rate cut and SEC ETF approval could boost altcoins

Two of the factors weighing on altcoin prices could be changing. Here's how:

1. Rate cuts may make investors more willing to take risk

When interest rates are low, borrowing becomes cheaper. This can translate into more liquidity for riskier investments, including cryptocurrencies. Lower rates also make it harder for investors to earn decent yields on things like bonds and savings accounts, offering an incentive to consider riskier assets.

2. A slew of SEC altcoin ETF approvals could shift the balance

Spot altcoin ETFs would make it easier for both retail and institutional investors to invest. And we will probably see a lot more of them in the next month.

The SEC has just released new standards that would streamline the spot crypto ETF approval process. With about 90 crypto ETF applications already in the pipeline, this could open the floodgates. Not only that, but there will be more multi-crypto ETFs which would make it easier for investors to gain altcoin exposure.

Altcoin season is not guaranteed

The boost from rate cuts and impending ETF approvals offers the best possible conditions for another altcoin season. However, every market cycle is different. The Fed's move hasn't triggered much of a crypto rally, in part because speculation had already pushed prices up beforehand. Not only that, but economic uncertainty and inflation concerns continue to weigh on investor sentiment.

Anything is possible in the unpredictable world of crypto. But the sheer volume of altcoins means it's unlikely we will see another broad rise in altcoin prices. However, as the ETF approvals start to come through, certain projects with strong fundamentals or sectors with solid use cases may benefit from an injection of institutional cash.

If you're considering adding altcoins to your portfolio, look for ways to manage the risk. For example, build a diversified mix of cryptocurrencies so you're not overly exposed to one or two sectors. And make sure that crypto only makes up a small part of your wider investments.

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Emma Newbery has positions in Avalanche, BNB, and Ethereum. The Motley Fool has positions in and recommends Avalanche, Bitcoin, and Ethereum. The Motley Fool has a disclosure policy.