Author: Sovereign Crypto
Translation: Blockchain in Vernacular
The stark reality is that this cycle has proven once again that while there may be some similarities between market cycles, they are by no means exact replicas. Institutional adoption driven by ETFs, changes in the political environment, and the plight of the mainstream economy have combined to change the underlying structure of the crypto market, forcing us to rethink many of our previous assumptions.
1. Fund flow dynamics
In previous cycles, capital flows have had a fairly predictable pattern:
1) New capital first enters the Bitcoin (BTC) market.
2) Then flow to Ethereum (ETH) and blue-chip tokens in search of higher returns.
3) Eventually enter the small and micro market cap token market to attract retail investors chasing "life-changing returns".
However, the capital flow pattern has changed significantly in this cycle. The current crypto market can be effectively divided into two ecosystems: institutional tokens and retail tokens.
2. Institutional Ecosystem
Access to BTC and ETH is mainly through spot ETFs. So far, funds have mainly flowed to BTC, causing its price to be nearly 40% higher than the previous all-time high (ATH). As the BTC market becomes saturated, institutional funds may look for higher returns, and ETH ETFs become almost the only option. In this shift, a large amount of capital will turn to ETH ETFs, and this flow of funds may cause the less liquid ETH market to react quickly (similar to the situation when the ETH spot ETF was initially approved, and the price rose 15% that day).
3. ETH rotation effect
The rise in ETH prices may further affect the blue-chip token market, as crypto-native companies with actual ETH holdings will begin to preemptively deploy the Alt-Season. At present, the rotation of ETH funds seems to be very close, but the specific time still needs to be observed.
This brings us to the second ecosystem: retail tokens.
4. Retail funds completely skip BTC and ETH
This is the first time in crypto history that retail investors are no longer involved in BTC and ETH, and then gradually migrate their returns to higher-risk assets. They realize that they have missed the best opportunities in BTC and ETH from the perspective of "life-changing returns", so they can only significantly increase their risk appetite.
In the real world, people are struggling: inflation oppresses people, high taxes, a stagnant job market, and high living costs make it impossible for most people to invest or save for retirement. They don’t care about BTC and ETH, but directly skip these “rich people’s coins” (BTC, ETH, and blue-chip tokens), download Phantom wallets, and plunge into the seemingly endless world of “Memecoin” without looking back, trying to find a “lottery” that can change their destiny. But most people will only fail and eventually quit the crypto field completely.
1) The flow of funds in the retail ecosystem has been completely disrupted:
Money flows directly to Memecoin, bypassing any technical or practical considerations. Profits are concentrated in the hands of a few experienced “old hands” who, like souvenir sellers at tourist attractions, wait for new retail investors to arrive and empty their wallets, tempting them with dreams of getting rich overnight (“Look at this guy who turned $50 into $1 million, you can do it too!”).
Currently, the altcoin market has not generated new wealth inflows, only the redistribution of wealth from "player to player" (PvP) from retail investors to professional scammers. Although Memecoin initially appeared as an "anti-establishment" altcoin with a fair launch, it has now turned into a highly manipulated scam: scammers grab most of the distribution when the token is issued, and then implement "rug pull" or even worse. This game is time-limited, and the capital that can be absorbed is limited. Once it is exhausted, the funds will find a new destination.
2) Expectations and impact
I predict that the current "Memecoin casino" will eat itself. The top Memecoins will likely survive and do well, while the rest will fade into oblivion, disappearing along with the wealth of retail investors. Even in the best case, this is nothing more than a giant game of "pass the parcel" where 95%+ of the participants will end up losing money.
The impact on the flow of funds for major tokens (such as SOL, AVAX, etc.) is that they will require large-scale venture capital, institutional funds, and retail capital injections to trigger a new round of altcoin market. This may happen after BTC and ETH funds overflow, when institutions and retail whales begin to seek higher-risk assets to carry new gains. Recently, whale wallets have begun to net sell BTC.
5. GameFi’s “stubborn virus”
During the GameFi craze early in this cycle, many game projects frequently launched "vapourware" with poor game quality, too high FDV (fully diluted valuation), useless token economics, and many other problems. This chaos has damaged the credibility of the GameFi space.
Today, high-quality projects that have spent years carefully building and preparing to launch face huge challenges and need to overcome this negative stereotype to gain market attention. Nevertheless, there are indeed some excellent projects with potential in the GameFi field. Once a successful game appears, the effect it brings may trigger a large-scale speculative boom in the entire GameFi ecosystem.
6. Current status of the startup platform
Launchpads have all but disappeared, but those that survive could see a strong comeback.
This model has been broken by venture capital funds (VCs) trying to extract maximum value from retail investors: long unlock periods, high FDV, exploitative centralized exchange (CEX) listing strategies, and predatory market maker behavior have put startups in a difficult position.
A new model is emerging, showing significant advantages: projects with low FDV, high unlocking ratio, and no CEX listing are far superior to VC projects of the old model. Investing in top-tier startup platforms will become key, as these opportunities will be more scarce and the barriers to entry will be higher.
What is certain is that it will only take a few 50x or 100x launches for retail investors to rush to buy the launch platform tokens and grab entry.
7. 95% of tokens are unnecessary and useless
Frankly speaking, the main function of crypto tokens is speculation. Only 5% of tokens are truly practical and represent partial ownership of revolutionary technologies and platforms. The rest of the tokens are pure speculative games and will eventually return to zero. But at the same time, choosing the right project can bring huge returns.
8. Dilution makes the market crowded and difficult to navigate
In 2020, the number of tokens in the crypto market was about 10,000 at the peak of the market. Today, the same number of tokens is created every day. The vast majority of these projects are worthless, but they create a kind of "noise" that obscures the truly valuable and innovative projects. There is no doubt that these revolutionary projects do exist, but it is difficult for ordinary investors to find them, especially those who only have a superficial understanding of the crypto field.
This also explains why many newcomers prefer to invest in Memecoin. They don't need to understand complex technology, they just need to see a cute dog wearing a hat, the only "function" of this dog is no function - plus a sense of excitement of "winning the lottery", which is enough to attract people.
9. The value output of KOLs is far lower than the value they plunder
Crypto influencers have degenerated to the point where only a handful are able to provide value and information. Most have turned to ridiculous clickbait headlines, shameless promotions, and even outright fraud.
The rise of Memecoin has greatly reduced the role of these influencers in real data. Instead, they have devoted themselves to unscrupulous promotion and "pump and dump". Be sure to carefully identify useful information and do not blindly follow these "pseudo-shepherds".
11. MicroStrategy could become the GBTC of this cycle
MicroStrategy ($MSTR) is trading at a crazy premium to its net asset value (NAV), reflecting the strong demand for Bitcoin in traditional financial markets. However, this premium is likely to reverse and turn into a discount as the cycle approaches its end. Watch this indicator, it may be a sign of a cycle reversal. Although there will inevitably be calls for a "super cycle" at the peak of the bull market, a massive bear market decline will inevitably follow.
For someone who can recognize these signals, this may become a great opportunity to short the market, but it will not appear in the short term.
12. Altcoin season is dead, Ethereum is dead... the ultimate contrarian indicator
The market is full of pessimistic voices about Ethereum and altcoins "no longer having a market". However, this is a perfect counter-indicator.
Despite Ethereum's poor performance, I still firmly hold its position, while holding long-term altcoin positions (some perform well, some perform poorly). Whenever everyone focuses on the rise of Bitcoin's price and abandons the positions of altcoins and Ethereum, until the crazy pursuit of BTC at the local top, the market of altcoins and Ethereum will really usher in.
13. ETF options will bring huge volatility - both up and down
On the first day of IBIT's listing alone, nearly $2 billion in notional option value was traded, mostly in call options (betting on BTC price increases). Sellers of these call options typically hedge by buying underlying ETFs, pushing up prices. This trend is likely to continue in the coming months.
14. Regulatory clarity is a huge positive, removing barriers to entry in the crypto space
In past cycles, capital entering the crypto space has faced various obstacles, such as difficulties in depositing and withdrawing funds, uncertain regulation, pending legal cases, and excessive caution from trading platforms and crypto companies. Now, this situation has completely changed. The launch of spot ETFs and regulatory clarity not only opens the floodgates for capital entering the crypto space, but also provides opportunities for funds that want to invest in crypto startups.
Everything is falling into place… No one could have foreseen that so many positive factors would coincide with such perfect timing. This bull run has the potential to be the most explosive ever, including altcoins and Ethereum. Be patient!
The benefits realized include:
- Bitcoin and Ethereum spot ETFs approved
- Trump's attitude towards cryptocurrencies has changed dramatically, and he is pushing for positive regulation
- Trump wins across the board
- SEC Chairman Gary Gensler Resigns
- Sovereign entities around the world buying Bitcoin
- China once again "lifts the ban" on cryptocurrencies
- Favorable legal precedent set in Coinbase and XRP case
- Stablecoin minting hits record high
- Bitcoin and Ethereum exchange balances hit record lows
- MicroStrategy plans to buy $42 billion in Bitcoin over the next three years
- Bitcoin ETF becomes the largest product in ETF history, several orders of magnitude larger than gold ETF
15. Infrastructure improvements amplify bull market potential
Trading platforms, wallets, DeFi protocols, and access to traditional finance have all been significantly improved. The user interface and user experience have become simpler and easier to use, and continue to be optimized under a more friendly regulatory environment. These improvements have greatly reduced resistance and will attract more retail capital to enter. Once the bull market starts, the scale of capital inflow will be immeasurable.
16. Summary
The development of this crypto bull market is full of unpredictable factors. However, one thing that is always easy to predict in each cycle is the inevitable emotional reaction of retail investors: the latest overvalued project is great, buy! The old undervalued project is boring, sell! The altcoin is dead, buy Bitcoin! Ethereum is dead, sell!
This emotional reaction is always comparable to the "Cramer-like effect", which is a perfect reverse indicator. In the end, 95% of retail investors will lose money. Become one of the 5%, and reverse thinking is the key. Good luck to everyone!
