Here are top three altcoin categories that are likely to pump the hardest in the 2023 alt season

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• Alt season is inching closer to reality as the Bitcoin rally loses steam after tagging $28,000. 
• Cyclical rotation of profits from BTC to altcoins combined with interest from sidelined investors are two reasons for an alt season.
• Eroding trust in banks and the Federal Reserve is the most significant reason for the cryptocurrency industry to inflate. 

Bitcoin has pumped 70% year-to-date, overshadowing Ethereum’s 50% return. This shift in the narrative has happened due to a variety of factors, but that is likely to change in the coming weeks due to a few fundamental reasons. Such a changing landscape will result in an alt season that will allow investors to compound their returns. 

Read more: Week ahead: March Mayhem continues with Fed, but cryptos emerge victorious

What is alt season and why is it important?

Alt season is a colloquial term that is used to describe an altcoin’s season. Alt season is a phase where investing in altcoins provides better returns as compared to Bitcoin or Ethereum. 

Here is a crude understanding of why alt seasons exist.

1. Fresh capital entering the cryptocurrency ecosystem generally flows into stablecoins, Bitcoin or Ethereum, since they’re considered relatively safe.
2. Due to this capital influx, markets rally.
3. The profit from these ecosystems, along with the new capital, moves into altcoins.
4. This rotation of capital triggers an alt season. 

The same steps are noted in the chart below.

Alt season dynamics

Global markets and their influence on cryptos

Due to the recent collapse in the banking sector, trust in financial institutions seems to be waning, which is causing more runs on banks. This positive feedback loop has two implications

• It prompts the Fed to backstop these banks by providing US Dollar liquidity.
• Regardless of what the Fed does, investors eventually flock to relatively safer assets to protect their wealth. 

Considering the recent rally in Bitcoin combined with the disconnect between BTC and the Greenback, one can speculate that the pioneer crypto is one such asset. The 70% year-to-date return that BTC has generated is a testament to the inflation-hedge narrative. Ethereum has followed the big crypto’s footsteps and yielded holders a 50% return for the same timeframe. 

As a result, BTC has enjoyed gains so far. However, due to uncertainty around the Fed’s upcoming interest decision scheduled on March 22, Bitcoin has remained flat around the $27,000 to $28,000 range.

After the initial volatility from these high-impact macroeconomic events subsides, the profits from BTC and ETH are likely to rotate into altcoins, triggering an alt season. While this flow of capital is common knowledge, investors need to take a well-educated guess and identify where the money will flow next.

Read more: Bitcoin, Ethereum prices seesaw ahead of the Fed’s decision on rate hike

Identifying crypto narratives and what altcoins will pump next? 

Crypto industry and the general society are driven by narratives. A few decades ago, it was war and patriotism, then it was the third industrial revolution where technology ballooned. Now we have transitioned to the fourth industrial revolution with the likes of blockchain technology, cryptocurrencies, Artificial Intelligence, quantum computers and so on. 

Society was influenced by art a few years ago, but due to the advent of technology and inclusiveness, memes have become an integral part of global culture. 

Coming back to crypto, one can speculate that as a narrative gains more popularity, altcoins in that ecosystem pump harder. A few days ago, it was AI coins that skyrocketed due to Google’s announcement of AI Bard, which was supposed to be a competitor to ChatGPT. During Ethereum’s Merge update, it was Proof-of-Stake (POS) coins. Likewise, due to the ongoing discussions and trending topics in the crypto ecosystem, these categories of altcoins are likely to pump the harder if they are not already pumping.

Top altcoin picks for 2023 alt season

Liquid Staking Derivatives (LSD)

Due to Ethereum’s Shanghai upgrade and staking incentives, altcoins in this ecosystem are likely to get a lot of attention. Some of LSD altcoins include,

• Lido DAO (LDO)
• RocketPool (RPL)
• Frax (FRAX)

Other coins related to staking but not directly connected to Ethereum like Near Protocol (NEAR), Ankr (ANKR), Thorchain (RUNE), EOSIO (EOS) and so on.

Zero Knowledge (ZK)

The ongoing crackdown from regulators and the general need for privacy is what is driving this narrative. Altcoins in this category include,

• ZigZag – yet to provide airdrops
• ZCash (ZEC)
• Mina Protocol (MINA)
• ImmutableX (IMX)

Other notable mentions in this category include Loopring (LRC), Polygon (MATIC), Horizon (ZEN), Dusk Network (DUSK) and so on.

Layer 2 (L2)

The coins in the ecosystem have been a crowd-favorite for quite some time, but the recent entry of Coinbase into the L2 race has sparked a renewed interest in altcoins in this ecosystem.

• Arbitrum (ARB) – yet to provide airdrops
• Polygon (MATIC)
• Optimism (OP)

Honorable mentions in the L2 category include IMX, LRC, SKALE (SKL) and so on.