Author: Sovereign Crypto
Translation: Plain Language Blockchain
The harsh reality is that this cycle 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 landscape, and the dilemmas of mainstream economics have collectively altered the underlying structure of the crypto market, forcing us to rethink many of our previous assumptions.
1. Dynamics of capital flow
In previous cycles, capital flow had a relatively predictable pattern:
1) New capital first enters the Bitcoin (BTC) market.
2) Subsequently 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 to chase 'life-changing returns'.
However, the flow of funds 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 accessing BTC and ETH through spot ETFs. So far, funds have primarily flowed into BTC, pushing its price nearly 40% higher than the last all-time high (ATH). As the BTC market approaches saturation, institutional funds may seek higher returns, making the ETH ETF almost the only option. In this transition, a large amount of capital will shift to the ETH ETF, and this flow of funds may cause the relatively illiquid ETH market to respond quickly in price (similar to when the ETH spot ETF was initially approved, when the price surged by 15% the same day).
3. ETH rotation effect
The rise in ETH prices may further spill over into 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, the capital rotation of ETH seems very close, but the specific timing still needs observation.
This leads to the second ecosystem: retail Tokens.
4. Retail capital completely skips BTC and ETH
For the first time in crypto history, retail investors are no longer involved in BTC and ETH, and are then gradually shifting their returns to higher-risk assets. They realize that from the perspective of 'life-changing returns', they have missed the best opportunities for BTC and ETH, and thus can only 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 make it difficult for most to invest or save for retirement. They are indifferent to BTC and ETH and instead skip over these 'rich people's coins' (BTC, ETH, and blue-chip Tokens), download the Phantom wallet, and dive 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 ultimately exit the crypto space altogether.
1) The capital flow in the retail ecosystem has been completely overturned:
Funds flow directly into Memecoins, completely bypassing considerations of technology or utility. Returns are mainly concentrated in the hands of a few experienced 'old hands', who wait for new retail investors to arrive and empty their wallets, enticing them with the belief that they can achieve a 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-to-player' (PvP) redistribution of wealth, shifting from retail investors to professional scammers. Although Memecoins initially appeared as 'anti-establishment' altcoins with fair launches, they have now transformed into highly manipulated scams: scammers seize a large portion of the allocation when Tokens are issued, followed by implementing 'rug pulls' or even worse behavior. This game is time-limited, with a finite amount of capital that can be extracted; once it's drained, the funds will seek new homes.
2) Expectations and Impacts
I expect the current 'Memecoin casino' to 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 just a huge 'pass the buck' game, where over 95% of participants will end up with losses.
The impact of capital flows on major Tokens (such as SOL, AVAX, etc.) is that they will need large-scale venture capital, institutional funds, and retail capital injections to trigger a new round of altcoin rallies. This could happen after capital overflows from BTC and ETH when institutional and retail whales begin to seek higher-risk assets to carry new gains. Recently, whale wallets have started to net-sell BTC.
5. The 'stubborn virus' of GameFi
During the early GameFi frenzy of this cycle, many game projects frequently launched 'vaporware', which had poor game quality, high FDV (Fully Diluted Valuation), useless Token economics, and many other issues. This chaos has damaged the reputation of the GameFi space.
Today, those quality projects that have spent years building and preparing for 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 hugely successful game appears, the effects may trigger a large-scale speculative frenzy across the entire GameFi ecosystem.
6. The current state of launch platforms
Launchpads have almost disappeared, but survivors may see a strong recovery.
Venture capital funds (VCs) have tried to extract maximum value from retail investors, leading to the destruction of this model: long lock-up periods, high FDV, oppressive centralized exchange (CEX) listing strategies, and predatory market maker behaviors have put launch platforms in trouble.
A new model is emerging, showing significant advantages: low FDV, high unlock ratios, and projects without CEX listings far outperform the old model's VC projects. Investing in top-tier launch platforms will be key, as these opportunities will become scarcer and have higher entry barriers.
It is certain that just a few projects launching at 50x or 100x will cause retail investors to rush to buy launch platform Tokens and seize entry qualifications.
7. 95% of Tokens are unnecessary and useless
Frankly, the primary function of crypto Tokens is speculation. Only 5% of Tokens truly have utility, representing partial ownership of revolutionary technologies and platforms. The remaining Tokens are purely speculative games that will ultimately go to zero. However, at the same time, choosing the right project can yield huge returns.
8. Dilution makes the market crowded and hard to find direction
In 2020, the number of Tokens in the crypto market peaked at around 10,000. Today, the same number of Tokens is created daily. The vast majority of these projects are worthless but create a 'noise' that obscures truly valuable and innovative projects. Undoubtedly, these revolutionary projects do exist, but ordinary investors find it challenging to locate them, especially those with only a surface-level understanding of the crypto space.
This also explains why many newcomers are more inclined to invest in meme coins (Memecoins). They do not need to understand complicated technologies; they only need to see a cute dog wearing a hat whose sole 'function' is to have no function - added to a sense of thrill of 'hitting the jackpot', that’s already enticing enough.
9. The value output of KOL is far lower than the value it plunders
The influencers in the crypto space have degraded to only a handful that can provide value and information. Most have turned to ridiculous clickbait, shameless promotion, or even outright fraud.
The rise of Memecoins has greatly reduced the role of these influencers in real data, as they instead devote themselves to shameless promotion and 'pump and dump'. It's essential to carefully discern useful information and not blindly follow these 'false shepherds'.
11. MicroStrategy may become the GBTC of this cycle
MicroStrategy ($MSTR) is seeing a crazy increase in the premium on its net asset value (NAV), reflecting strong demand for Bitcoin in traditional financial markets. However, as the cycle approaches 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, what follows will undoubtedly be a massive bear market decline.
For those who can recognize these signals, this may become an excellent opportunity to short the market, but it won't happen in the short term.
12. The altcoin season is 'dead', Ethereum is 'dead'... the ultimate contrarian indicator
The market is flooded with pessimistic voices about Ethereum and altcoins 'no longer having a market'. However, this is precisely a perfect contrarian indicator.
Despite Ethereum's poor performance, I still firmly hold my position in it, while also holding long-term altcoin positions (some performing well, some poorly). Whenever everyone focuses on Bitcoin's price increase and gives up their altcoin and Ethereum positions, it will only be when they frantically chase BTC at the local top that the real altcoin and Ethereum market will arrive.
13. ETF options will bring huge volatility - whether up or down
On the first day of listing on IBIT, nearly $2 billion in nominal options value was traded, mostly concentrated on call options (betting on BTC price rises). The sellers of these call options usually hedge by purchasing the underlying ETF, thereby driving up the price. 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 various obstacles, such as difficulties in deposits and withdrawals, uncertain regulations, 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 has not only opened the floodgates for capital entering the crypto space but has also provided opportunities for funds wanting to invest in crypto startups.
Everything is in place... No one could foresee that so many positive factors would coincide at such a perfect time. This bull market has the most explosive potential in history, including altcoins and Ethereum. Be patient!
Realized positives include:
Bitcoin and Ethereum spot ETFs have been approved
Trump's attitude towards cryptocurrency has significantly changed and is promoting positive regulation
Trump wins the election
SEC Chairman Gary Gensler resigns
Sovereign entities in various countries purchase Bitcoin
China has once again 'lifted the ban' on cryptocurrency
Establishing favorable legal precedents in the 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
Access methods for trading platforms, wallets, DeFi protocols, and traditional finance have been significantly improved. User interface and user experience have become simpler and more user-friendly, continuously optimized in a more favorable regulatory environment. These improvements have greatly reduced friction and will attract more retail capital, and 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 has always been easy to predict in every cycle: the inevitable emotional reactions of retail investors: the latest overvalued project is amazing, buy! The old undervalued project is too boring, sell! Altcoins are down, buy Bitcoin! Ethereum is failing, sell!
This emotional reaction is always comparable to the 'Cramer effect', perfectly serving as a contrarian indicator. In the end, 95% of retail investors will lose money. Be sure to be among that 5%, and contrarian thinking is key. Good luck to everyone!
