Bull markets often experience a pause when optimism reaches extreme levels, only to resume once speculative fervor subsides. This phenomenon is evident in the crypto market as well.
Capriole Investment’s crypto speculation index indicates that the speculative bubble seen in the first quarter has deflated, hinting at a possible resurgence in bullish activity for bitcoin (BTC), the dominant cryptocurrency by market capitalization.
The speculation index, which gauges the percentage of alternative cryptocurrencies (altcoins) outperforming bitcoin over a 90-day period, has settled below 10%, a significant drop from the peak of nearly 60% recorded in January. Bitcoin, which soared to new all-time highs surpassing $70,000 earlier in the year, has since retraced to around $58,000.
Presently, there are over 14,800 altcoins in circulation, with many struggling to establish their utility and liquidity. Consequently, altcoins are often viewed as speculative assets, with their trading volumes closely linked to retail investor interest as indicated by Google Trends. The outperformance of altcoins compared to BTC is often seen as a symptom of excessive speculation in the market.
Periods of speculative excess typically lead to corrections that align asset valuations with their underlying fundamentals, curbing irrational exuberance. These corrections pave the way for a more sustainable market environment in the long term.
Such corrective phases have historically preceded significant bitcoin rallies. Instances of the speculation index remaining below 10% in the past have heralded notable price surges for bitcoin, such as those witnessed in the first half of 2019, late 2020, and the latter part of 2023.