Written by: Sovereign Crypto
Translated by: Baihua Blockchain
The harsh reality shows that this cycle again proves that while there may be some similarities between market cycles, they are by no means exact replicas. The 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 a relatively predictable pattern:
1) New capital first enters the Bitcoin (BTC) market.
2) Then flows into Ethereum (ETH) and blue-chip tokens in search of higher returns.
3) Eventually entering the small and micro-cap token market, attracting retail investors chasing 'life-changing returns'.
However, the capital flow pattern in this cycle has changed significantly. The current crypto market can be effectively divided into two ecosystems: institutional tokens and retail tokens.
2. Institutional ecosystem.
Mainly accessed BTC and ETH through spot ETFs. So far, funds have mainly flowed into BTC, raising its price nearly 40% above the last historical high (ATH). As the BTC market becomes saturated, institutional funds may look for higher returns, with ETH ETF becoming almost the only choice. In this transition, a significant amount of capital will shift towards ETH ETF, and this capital flow may cause the relatively illiquid ETH market to react quickly in price (similar to when the ETH spot ETF was first approved, causing a 15% price increase on the same day).
3. ETH rotational effect.
The price increase of ETH may further impact the blue-chip token market, as crypto-native companies holding actual ETH positions will begin to position themselves ahead of the token season (Alt-Season). Currently, ETH's capital rotation seems to be 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 completely avoiding BTC and ETH, then gradually shifting their profits to higher-risk assets. They realize that from the perspective of 'life-changing returns', they have missed the best opportunities in BTC and ETH, so they have to significantly increase their risk appetite.
In the real world, people are struggling: inflation is oppressing them, high taxes, a stagnant job market, and high living costs leave most people unable to invest or save for retirement. They are indifferent to BTC and ETH, instead skipping these 'rich man coins' (BTC, ETH, and blue-chip tokens), downloading Phantom wallets, and diving headlong into the seemingly endless world of 'Memecoins', trying to find a 'lottery' that can change their fate. But most will only encounter failure and eventually exit the crypto space entirely.
1) The capital flow of the retail ecosystem has been completely overturned:
Funds are flowing directly into Memecoins, completely bypassing considerations of technology or utility. Returns are primarily concentrated in the hands of a few experienced 'old hands' who act like souvenir merchants at tourist attractions, waiting for new retail investors to arrive and empty their wallets, tempting them with dreams of overnight riches ('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, but rather is a 'player versus player' (PvP) redistribution of wealth, shifting from retail investors to professional scammers. Memecoins, which initially emerged as fair-launch 'anti-establishment' altcoins, have now turned into highly manipulated scams: scammers seize a large share of the allocation at token issuance, followed by 'rug pulls' or even worse behavior. This game is time-limited, with a finite capital that can be extracted; once it is drained, the funds will seek new homes.
2) Expectations and impacts.
I expect that the current 'Memecoin casino' will self-destruct. Leading Memecoins may survive and perform well, while the rest will gradually be forgotten, disappearing along with the wealth of retail investors. Even in the best-case scenario, this is merely a gigantic game of 'pass the parcel', in which over 95% of participants will end up losing money.
The impact on the capital flow of major tokens (such as SOL, AVAX, etc.) is that they will need massive venture capital, institutional funds, and retail capital injection to trigger a new round of altcoin rallies. This could happen after capital overflows from BTC and ETH, when institutions and retail whales begin to seek higher-risk assets to carry new gains. Recently, whale wallets have begun net-selling BTC.
5. The 'stubborn virus' of GameFi.
In the early GameFi craze of this cycle, many gaming projects frequently launched 'vapourware', which had poor game quality, excessively high FDV (fully diluted valuation), useless token economics, and many other issues. This chaos has damaged the reputation of the GameFi space.
Today, high-quality projects that have spent years building and preparing to launch face enormous challenges and need to overcome this negative stereotype to gain market attention. Nevertheless, there are indeed some promising projects in the GameFi space, and once a highly successful game emerges, its effect may trigger a massive speculative frenzy across the entire GameFi ecosystem.
6. The current state of launch platforms.
Launchpads have almost disappeared, but the survivors may welcome a strong resurgence.
Venture capital funds (VCs) once tried to extract maximum value through retail investors, leading to a breakdown of this model: long unlock periods, high FDV, predatory centralized exchange (CEX) listing strategies, and exploitative market-making behaviors left launch platforms in distress.
A new model is emerging, showing significant advantages: low FDV, high unlocking ratios, and projects without CEX listings far outperform the old model VC projects. Investing in top launch platforms will become key, as these opportunities will become scarcer and the entry barrier higher.
It is certain that only a few 50x or 100x projects launching will have retail investors scrambling to buy launch platform tokens and secure 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 eventually go to zero. However, at the same time, choosing the right project can yield huge returns.
8. Dilution makes the market crowded and difficult to find direction.
In 2020, the number of tokens in the crypto market was about 10,000 at the peak. Now, the same number of tokens is being created daily. The vast majority of these projects have no value, yet 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 those whose understanding of the crypto space is limited to the surface.
This also explains why many newcomers prefer to invest in meme coins (Memecoins). They do not need to understand complex technology; they only need to see a cute dog wearing a hat, whose only 'function' is to have no function—plus a sense of excitement akin to 'winning the lottery', which is already enough to attract them.
9. The value output of KOLs is far lower than the value they plunder.
Crypto influencers have degraded to only a few who can provide value and information. Most have turned to ridiculous clickbait, shameless promotions, or even outright fraud.
The rise of Memecoins has significantly reduced the real data impact of these influencers, who instead fully engage in shameless promotions and 'pump and dump' schemes. Be sure to carefully discern useful information and do not blindly follow these 'false shepherds'.
11. MicroStrategy could 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 could signal a cycle reversal. Although there will inevitably be calls for a 'super cycle' at the peak of the bull market, what follows is bound to be a massive bear market decline.
For those who can identify these signals, this may become an excellent opportunity to short the market, but not in the short term.
12. Altcoin season is 'dead', Ethereum is 'dead'... the ultimate contrarian indicator.
The market is flooded with pessimistic voices about Ethereum and altcoins having 'no more trends'. However, this is precisely a perfect contrarian indicator.
Despite Ethereum's poor performance, I still firmly hold my position in it, while also holding positions in long-term altcoins (some performing well, others poorly). Whenever everyone focuses on Bitcoin's price rise and abandons their positions in altcoins and Ethereum, only when they frantically chase after BTC at local tops will the altcoin and Ethereum market truly arrive.
13. ETF options will bring tremendous volatility—whether up or down.
On the first day of IBIT listing alone, nearly $2 billion in nominal option value was traded, mostly concentrated in call options (betting on BTC price increases). The sellers of these call options typically hedge by buying underlying ETFs, thus pushing prices higher. This trend may continue in the coming months.
14. Regulatory clarity is a huge positive, eliminating barriers to entry in the crypto space.
In past cycles, capital entering the crypto space faced numerous obstacles, such as difficulties in depositing and withdrawing funds, uncertain regulations, pending legal cases, and excessive caution from trading platforms and crypto companies. Now, this situation has undergone a complete transformation. The launch of spot ETFs and regulatory clarity not only opened the floodgates for capital entering the crypto space but also provided opportunities for funds wanting to invest in crypto startups.
Everything is in place... No one could foresee so many favorable factors coinciding 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 of various countries purchasing Bitcoin.
China 'unbans' cryptocurrency again.
Favorable legal precedents set in Coinbase and XRP cases.
The minting volume of stablecoins reaches an all-time high.
The balance of Bitcoin and Ethereum trading platforms reaches an all-time low.
MicroStrategy plans to purchase $42 billion worth of Bitcoin over the next three years.
Bitcoin ETF has become 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 traditional financial access methods have been significantly improved. User interfaces and user experiences have become simpler and more user-friendly, continuously optimizing 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 inflow will be unimaginable.
16. Summary.
The development of this crypto bull market is filled with unpredictable factors. However, one thing is always easy to predict in each cycle: the inevitable emotional reactions of retail investors: the latest overhyped project is too amazing, buy! The old undervalued projects are too boring, sell! Altcoins are cold, buy Bitcoin! Ethereum is failing, sell it!
This emotional reaction is always akin to the 'Cramer Effect', perfectly becoming a contrarian indicator. Ultimately, 95% of retail investors will lose money. Be sure to be part of that 5%, and contrarian thinking is key. Good luck to everyone!
