Source of article reprint: Blockchain Simplified
Author: Sovereign Crypto
Translation: Blockchain Simplified
The harsh reality indicates that this cycle once again proves 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 dilemmas of the mainstream economy have collectively altered the underlying structure of the crypto market, forcing us to rethink many of our previous assumptions.
1. Capital flow dynamics
In previous cycles, capital flows had relatively predictable patterns:
1) New capital first enters the Bitcoin (BTC) market.
2) Then flowing into Ethereum (ETH) and blue-chip tokens in search of higher returns.
3) Finally entering the small and micro-cap token market, attracting retail investors chasing 'life-changing gains.'
However, the capital flow model in this cycle has changed significantly. The current crypto market can effectively be divided into two ecosystems: institutional tokens and retail tokens.
2. Institutional ecosystem
Mainly accessing BTC and ETH through spot ETFs. As of now, capital is primarily flowing into BTC, pushing its price nearly 40% above the last historical high (ATH). As the BTC market becomes saturated, institutional funds may seek higher returns, with ETH ETFs becoming almost the only option. In this transition, a large amount of capital will shift to ETH ETFs, and this capital flow may cause the relatively illiquid ETH market to respond quickly to price changes (similar to when the ETH spot ETF was initially approved, with the price rising 15% on that day).
3. The ETH rotation effect.
The increase in ETH's price may further impact the blue-chip token market, as crypto-native companies with actual ETH holdings will begin to position themselves ahead of the token season (Alt-Season). Currently, ETH's capital rotation seems very close, but the exact timing still needs to be observed.
This leads 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 are gradually migrating their profits to higher-risk assets. They realize that, from the perspective of 'life-changing gains,' they have missed the best opportunities in BTC and ETH, so they can only significantly increase their risk appetite.
In the real world, people are struggling: inflation is oppressive, high taxes, a stagnant job market, and high living costs leave most unable to invest or save for retirement. They are indifferent to BTC and ETH, instead skipping directly past these 'rich men's coins' (BTC, ETH, and blue-chip tokens), downloading the Phantom wallet, and diving headfirst into the seemingly endless world of 'Memecoins,' trying to find a 'lottery' that can change their fate. But most people will only encounter failure and eventually exit the crypto space entirely.
1) The capital flow dynamics of the retail ecosystem have been completely overturned:
Funds flow directly into Memecoins, completely bypassing considerations of technology or utility. Profits are mainly concentrated in the hands of a few experienced 'veterans,' who, like souvenir vendors at tourist attractions, wait for new retail investors to arrive and empty their wallets, tempting them to believe in the dream of overnight wealth ('Look at this case of turning $50 into $1 million; you can do it too!').
Currently, the altcoin market has not generated new wealth inflows; it is merely a 'player versus player' (PvP) wealth redistribution, moving from retail investors to professional scammers. Although Memecoins initially appeared as fairly launched 'anti-establishment' altcoins, they have now transformed into highly manipulated scams: scammers take the majority of allocations upon token issuance, followed by implementing 'rug pulls' or even worse actions. This game is time-limited, with a finite amount of capital that can be extracted; once it is drained, the funds will seek new homes.
2) Expectations and impacts
I expect the current 'Memecoin casino' to consume itself. Top Memecoins may survive and perform well, while the rest will gradually be forgotten, disappearing with the wealth of retail investors. Even in the best-case scenario, this is just a huge game of 'pass the parcel,' where over 95% of participants will end up with losses.
The impact on the capital flow of major tokens (such as SOL, AVAX, etc.) is that they will need a significant injection of venture capital, institutional funds, and retail capital to trigger a new round of altcoin rallies. This may occur after the capital overflows from BTC and ETH, as institutional and retail whales begin to seek higher-risk assets to carry their newly gained profits. Recently, whale wallets have started to net sell BTC.
5. The 'stubborn virus' of GameFi
In the early GameFi frenzy of this cycle, many game projects frequently launched 'vapourware,' which were low-quality games with excessively high FDV (fully diluted valuation), useless token economics, and numerous other issues. This chaos has damaged the reputation of the GameFi sector.
Today, high-quality projects that have spent years building and preparing for launch face significant challenges and must overcome this negative stereotype to gain market attention. Nevertheless, there are indeed some excellent projects in the GameFi space with potential; once a game becomes a major success, the resulting effect may trigger a massive speculative frenzy across the entire GameFi ecosystem.
6. The current state of launch platforms
Launchpads have nearly disappeared, but survivors may experience a strong revival.
Venture capital firms (VCs) once tried to extract maximum value from retail investors, leading to the breakdown of this model: long unlocking periods, high FDV, exploitative centralized exchange (CEX) listing strategies, and predatory market-making behaviors have put launch platforms in distress.
A new model is emerging, showing significant advantages: projects with low FDV, high unlocking ratios, and no CEX listings far outperform old VC projects. Investing in top launch platforms will become key, as these opportunities will be scarcer and the entry barriers will be higher.
It is certain that just a few projects launching at 50x or 100x will drive retail investors to scramble for launch platform tokens and secure their entry qualifications.
7. 95% of tokens are unnecessary and useless
Frankly speaking, the main function of crypto tokens is speculation. Only 5% of tokens truly have utility, representing partial ownership of revolutionary technology and platforms. The rest are purely speculative games that will ultimately go to zero. However, at the same time, choosing the right project can yield enormous returns.
8. Dilution makes the market crowded and difficult to find direction.
In 2020, the number of tokens in the crypto market was around 10,000 at the market peak. Today, the same number of tokens is created every day. The vast majority of these projects are worthless, but they create a 'noise' that obscures truly valuable and innovative projects. Undoubtedly, these revolutionary projects do exist, but ordinary investors find it difficult to locate them, especially for those whose understanding of the crypto field is limited to the surface.
This also explains why many newcomers are more inclined to invest in meme coins. They do not need to understand complex technologies; they just need to see a cute dog wearing a hat, whose only 'function' is to have no function—combined with a sense of 'winning the lottery,' this is enough to attract them.
9. The value output of KOLs is far lower than the value they plunder.
Influencers in the crypto space have deteriorated to a very small number that can provide value and information. Most have turned to ridiculous clickbait, shameless promotions, or even blatant fraud.
The rise of Memecoins has significantly reduced the role of these influencers on real data; they have instead thrown themselves into shameless promotion and 'pump and dump.' Be sure to carefully discern useful information and not blindly follow these 'fake shepherds.'
11. MicroStrategy may become the GBTC of this cycle
MicroStrategy's (MSTR) premium over its net asset value (NAV) is skyrocketing, reflecting strong demand for Bitcoin in traditional financial markets. However, as the cycle nears its end, this premium is likely to reverse and turn into a discount. Pay attention to this indicator, as it may signal a cycle reversal. Although there will inevitably be calls for a 'super cycle' at the peak of a bull market, a massive bear market decline will surely follow.
For those who can recognize these signals, this may become an excellent 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 filled with pessimistic voices about 'no more action' in Ethereum and altcoins. However, this is the perfect contrarian indicator.
Despite Ethereum's poor performance, I still firmly hold my position in it, along with positions in long-term held altcoins (some performing well, others poorly). Whenever everyone focuses on Bitcoin's price rise and abandons their altcoin and Ethereum positions, it will be only when they madly chase BTC at the local top that the real altcoin and Ethereum market will arrive.
13. ETF options will bring significant volatility—whether up or down.
On the first day of listing on IBIT, nearly $2 billion in nominal options value was traded, mostly concentrated in call options (betting on BTC price increases). The sellers of these call options typically hedge by purchasing underlying ETFs, thus pushing prices higher. This trend may continue to play out in the coming months.
14. Regulatory clarity is a significant boon, eliminating barriers to entry in the crypto space.
In previous cycles, capital entering the crypto space faced various obstacles, such as difficulties in deposits and withdrawals, uncertain regulations, unresolved 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 has not only opened the floodgates for capital entering the crypto space but has also provided opportunities for funds looking to invest in crypto startups.
Everything is in place... No one could foresee that so many positive factors would coincide at such a perfect timing. This bull market has the most explosive potential in history, including altcoins and Ethereum. Be patient!
Realized positives include:
Approval of Bitcoin and Ethereum spot ETFs
Trump's attitude towards cryptocurrency has significantly changed, promoting positive regulation.
Trump's comprehensive victory
SEC Chairman Gary Gensler resigns
Sovereign entities in various countries purchase Bitcoin
China once again 'unbans' cryptocurrency
Establishing favorable legal precedents in Coinbase and XRP cases
Stablecoin minting hits an all-time high
Bitcoin and Ethereum trading platform balances hit an all-time low
MicroStrategy plans to purchase $42 billion worth of Bitcoin over the next three years
Bitcoin ETF becomes the largest product in ETF history, several orders of magnitude larger than gold ETFs
15. Infrastructure improvements amplify bull market potential.
Trading platforms, wallets, DeFi protocols, and access methods for traditional finance have seen significant improvements. User interfaces and user experiences have become simpler and more user-friendly, continuously optimized under a more favorable regulatory environment. These improvements have greatly reduced friction and will attract more retail capital; once the bull market starts, the scale of capital inflows will be immeasurable.
16. Summary
The development of this crypto bull market is filled with unpredictable factors. However, one thing that is always easy to predict in every cycle is the inevitable emotional reaction of retail investors: the latest overvalued project is too amazing, buy! The old undervalued project is too boring, sell! Altcoins are cold, buy Bitcoin! Ethereum is not doing well, sell it!
This emotional reaction is always comparable to the 'Cramer effect,' perfectly serving as a contrarian indicator. Ultimately, 95% of retail investors will lose money. Make sure to be part of that 5%, and contrarian thinking is key. Good luck to everyone!
