The Altcoin Bear Market: A Harsh Reality for Most Traders

👇1-14) Today’s title resonates with everybody who traded altcoins in 2017 or 2021. We analyzed 115 coins; the average crypto coin is already down 50% from the 2024 highs. As we explain below, those losses will be more severe unless crypto liquidity improves. Bitcoin (-11%) and Ethereum (-13%) are holding up well and are likely benefiting as smarter traders switch out of altcoins and into those two – this happened during the last two cycles.

Top 115 tokens - drawdown from 2024 highs (Bitcoin only -11 %)

👇2-14) Surviving the altcoin bear market hinges on one crucial factor: effective risk management. Token unlocks, and unfavorable crypto liquidity indicators are the primary catalysts of this altcoin crash (see yesterday’s report).

👇3-14) On May 8, we issued a warning, ‘Beware of Token Unlocks. Will Venture Capital Funds cut this Altcoin cycle short?’ as “a rapid succession of nearly $2 billion of token unlocks during the next ten weeks could lower the market for altcoins.” A central argument was that Venture Capital funds invested $13 billion in Q1 2022 while the market turned into a steep bear market. Those funds are now under pressure from their investors to return capital as AI has become a hotter theme.

👇4-14) Today, altcoins are in a brutal bear market. In 2024, 73% of those 115 coins peaked in March. We have been correct in calling for Bitcoin's outperformance against everything else, notably Ethereum, but in early March, the game changed. What was so unique about March, and what has changed?

17% (LHS) of the 115 largest tokens peaked on March 14 (now 100% seeing drawdowns RHS)

👇5-14) In early March 2024, Bitcoin reached our potential year-end target of 70,000. Last year, we accurately called for a 45,000-year-end target in 2023. In October 2022, we also correctly predicted a Bitcoin rally to 63,000 into the 2024 halving. Higher targets (125,000) can be derived quantitatively, but shrinking crypto market liquidity (forget M2) is holding the market back.

👇6-14) On March 8, we turned cautious and tried to buy tactical potential breakouts above 70,000 but using 68,300 as our ‘line in the sand’ stop level. After all, we are traders. When Bitcoin declined below 60,000, we lowered this line in the sand to 62,000 as a re-entry ‘buy’ level in case our 55,000 target fell short [May 3].

👇7-14) We are at a critical moment in this bull market. Understanding and following risk management principles might separate traders from those who hold ‘the bag’ as altcoins eventually tend to decline at the end of bull markets.

👇8-14) In late February 2024, the Solana meme coin hype exploded (see yesterday’s report). This was also when South Korea’s ruling People Power Party made several promises around the crypto sector (including potentially allowing a Bitcoin Spot ETF) ahead of the April 10 national elections, causing daily trading volumes in Korea to ramp up from $3bn to $16bn (twice that of all Korean stocks). Shiba Ina was the most actively traded coin for days, but everything died in March.

👇9-14) Occasionally, we have dabbled in altcoins but always focused on high-quality, well-funded Altcoins. We used a moving average as a stop, as managing one’s downside is paramount. Crypto is very cyclical, and a buy-and-hold strategy will unlikely work over the medium (or long) term. Instead, analyzing crypto liquidity and macro and using a trader mindset (risk management) framework is critical to protecting capital so that you are in a position when the cycle turns up again. This is why our approach is tactical, and we can be very aggressive traders when the environment is positive.

👇10-14) On April 4, we introduced our ‘Self-Reinforcing Bitcoin Mechanism At Play Framework,’ which showed how the Bitcoin ETF flows set positive market sentiment but were a function of arbitrage flows, which were themselves driven by increased retail speculation that pushed up the funding rate. But those flows dried up, and despite weaker inflation data this month, Bitcoin ETFs are seeing sharp outflows ($-900m in the last seven trading days).

👇11-14) With Bitcoin's funding rate (and CME futures premium) approaching zero, we could see more unwinding ahead of the next monthly roll when open interest moves into the next CME contract (June 28 expiry date). Although many have by now realized that these ETF flows are predominantly arb flows (we estimated 30-40%), they have certainly lost their positive signaling effect and, with the funding rate near zero, will unlikely come back.

👇12-14) Bitcoin ETF inflows stopped in March when the market became concerned about higher inflation, and this is when most altcoins also peaked. Stablecoin minting slowed down shortly after the Bitcoin halving and failed to provide additional liquidity for altcoins. The $2 billion unlock overhang was just the icing on the cake.

👇13-14) As trading activity (especially in meme coins) increased dramatically in March and early April, many traders have likely accumulated positions at unfavorable levels. Many coins will come and go, but Bitcoin will always stay there for the next bull market.

👇14-14) Like in previous bull markets, traders might hold on to altcoins (holding the bag). In contrast, smarter traders might protect themselves by moving their exposure into Bitcoin when liquidity slows. The difference between retail and institutional trading is that a risk manager will eventually force the (altcoin) trader to liquidate the position in institutions. In contrast, retail does not want to take a loss and ride the position to zero.