Original author: tzedonn
Original translation: TechFlow
After a crazy fourth quarter, it’s time to take a moment to reflect. In just three months, many significant changes have taken place in the market.
The situation this time is different from the past.
Everyone is looking forward to the arrival of the alt season (the moment when the blue line exceeds the orange line), just like in 2021-2022, when the prices of all alts explode. However, since the launch of the Bitcoin ETF in January 2024, the gap between Bitcoin (BTC) and the TOTA L2 Index (representing the total market value of alts) has continued to widen.
In the past alt season, investors usually transferred the gains of Bitcoin to higher-risk assets, driving the overall rise of the alt market. This phenomenon formed a classic capital flow pattern .
But today, Bitcoins capital flow has been completely disconnected from other cryptocurrencies, forming an independent ecosystem.
The inflow of funds into Bitcoin is mainly driven by the following three aspects:
ETF: Currently, ETF funds hold 5.6% of the worlds Bitcoin;
Microstrategy: This company holds 2.25% of Bitcoin and is an institution that continues to buy;
Macroeconomic factors: including interest rates, political situation (for example, the US sovereign wealth fund or other countries may buy Bitcoin).
On the other hand, Bitcoin’s capital outflows mainly include:
The U.S. government currently holds about 1.0% of Bitcoin and says it may not sell it.
Bitcoin miners: Due to daily operational needs, miners will periodically sell some of their Bitcoins;
Bitcoin whales: These investors who hold large amounts of Bitcoin have seen the value of their assets increase by about 5 times since the market low in 2023.
Obviously, the drivers of these capital flows are completely different from those in the copycat market.
Copycat market: Are there enough players?
The copycat market can be likened to a casino.
Only when there is sufficient capital flow in the casino (i.e. high net capital inflow) is it a good time to participate. Choosing the right gaming table (i.e. investment target) is equally important.
The sources of capital inflow into the copycat market are as follows:
New capital inflows:
For example, in 2021, a large number of retail investors entered the crypto market, bringing in new funds. However, the current inflows through the issuance of Phantom/Moonshot or TRUMP tokens and the growth of USDT/C market capitalization do not seem to be enough to support the market.
In addition, certain specific assets may also benefit from capital rotation. For example, some investors who never invest in memes may start to pay attention to AI memes because these investments are easier to rationalize.
Leveraged funds obtained through decentralized finance (DeFi) platforms (such as Aave, Maker/Sky) or centralized finance (CeFi) platforms (such as BlockFi, Celsius). From an institutional perspective, the CeFi market is no longer active after the collapse in 2021. In the DeFi field, the IPOR index (used to track USDT/C borrowing rates) shows that the rate has dropped from about 20% in December 2023 to about 8% currently.
Token buyback and destruction: making players’ chips more valuable
The “buyback and burn” mechanism in crypto projects is similar to how the poker boss uses revenue to increase the value of players’ chips.
A typical example is the HYPE Insurance Fund, which repurchased 14.6 million HYPE at $24 per coin, worth approximately $350 million.
However, most crypto projects have not achieved sufficient product-market fit (PMF), making it difficult to conduct buybacks of sufficient scale through revenue to significantly affect token prices (such as the buyback case of JUP).
The outflow of casino funds: Who is cashing in the chips?
Large fund withdrawal incidents
In January, there were two “once-in-a-lifetime” large-scale fund withdrawal events in the market:
Trump event: funding grew from $0 to $75 B, then quickly dropped to $16 B;
Melania incident: funding grew from $0 to $14 B, then dropped to $1.5 B.
These two events conservatively estimated to have drained over $1 B in liquidity from the crypto market ecosystem. In other words, if someone made over $10 M on a trade, they likely moved over 50% of their gains to the OTC market.
Tool-driven continuous fund extraction
In addition to large events, some tools are also continuing to drain market funds:
Pump.fun: Cumulative revenue reached $520M in about 1 year;
Photon: Cumulative revenue of approximately $350M ;
Bonkbot, BullX, and Trojan: Cumulative revenue of approximately $150M each.
These tools gradually remove large amounts of money from the market through decentralized small withdrawals.
Cabal Extraction and Pre-sale Model
Cabal withdrawals and pre-sales often mark the end of a market cycle. This is because a small number of people will withdraw huge amounts of money during this phase and move them to the OTC market. As the cycle approaches its end, the duration of these events becomes shorter and shorter:
Pasternak: It only lasted about 10 hours;
Jellyjelly: Lasted about 4 hours;
Enron Pump: Lasted only 10 minutes.
This rapid outflow of funds has been vividly called the euthanasia roller coaster because it causes the market to experience short-term but dramatic fluctuations.
Unlocking VC Funds
Venture capital firms unlock funds and convert crypto assets into US dollars to return distributed investment income (DPI) to their limited partners (LPs). For example, in the TIA project, VCs have drained a lot of money from the crypto market in this way.
Deleveraging
There is also a phenomenon of deleveraging in the market, such as reducing the lending rate of USDT (Tether). This behavior will lead to a gradual reduction in leveraged funds in the market, further affecting liquidity.
(Original image from tzedonn , compiled by TechFlow)
The choice of copycat: How to find your own card table?
In the crypto market, choosing the right investment target is the key to success. The process can be likened to choosing the right poker table.
When the market is active (i.e. there are a lot of players participating), your potential returns will be higher, but only if you choose the right tokens.
This type of investing is called poker because it is essentially a zero-sum game.
In this game, items are either:
Failure to generate revenue or value;
The generated value is attributed to the token.
The only possible exceptions are the following two types of projects:
Frequently used L1s, such as SOL and ETH;
Products that can generate high revenue, such as HYPE.
It’s important to note that some investors are betting on “fundamentals” that a team will be able to generate sustainable revenue in the future, but in the short term, I’m more pessimistic about this.
The situation in 2025: too many tables and too few players.
By 2025, the crypto market has become more competitive and finding the right investment targets is more difficult than ever. This is because there are too many poker tables (i.e. token projects) in the market at the same time.
Here are some statistics:
About 50,000 new tokens are launched every day through Pump.fun;
Since the launch of Pump.fun, more than 7 million tokens have been listed, of which about 100,000 have ended up on the Raydium platform.
Obviously, there are not enough investors in the market to support all these token projects. Therefore, the investment returns of altcoins show a strong trend of differentiation.
Choosing the right investment target has become an art, and usually requires considering the following aspects:
The strength of the team and products;
the narrative behind the project;
Spreadability and marketing effectiveness.
Kel has written a great article that discusses in detail how to choose a copycat investment target.
what does that mean?
Altcoins are no longer “high-beta Bitcoin.” The investment theory of the past that “holding Altcoins instead of Bitcoin” can get higher returns may no longer apply.
The importance of asset selection has increased. With the Pump.fun platform lowering the threshold for token issuance to almost zero, choosing the right altcoin has become more important than ever. The inflow of funds in the market can no longer drive all token prices up evenly.
Altcoin investment is more like a poker game. Although it sounds a bit pessimistic to compare Altcoin investment to a poker game, it is indeed a true portrayal of the current market. Maybe in the future I will write an article to explore the real long-term use cases of cryptocurrency.
Has the market peaked? At present , the market may have peaked temporarily, but the future trend remains to be seen.
When will the next copycat season come?
The traditional “four-year cycle” theory may have broken down as altcoins are increasingly moving away from the influence of Bitcoin (BTC).
In the future, the market of altcoins may be triggered by some unexpected events, such as phenomenal events like GOAT.
In the long run, the prospects of the crypto market are still very promising, especially under the influence of the US Sovereign Wealth Fund (US SWF), governments that support Bitcoin, and the introduction of stablecoin-related bills.
The future is full of uncertainty, but also opportunities. Good luck and have fun!
