Written by: Sovereign Crypto
Translated by: Blockchain in Plain Language
The harsh reality indicates that this cycle once again proves that although 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 in the mainstream economy have collectively altered the underlying structure of the crypto market, forcing us to rethink many previous assumptions.
1. Dynamics of capital flow.
In previous cycles, capital flow exhibited a relatively predictable pattern:
1) New capital first enters the Bitcoin (BTC) market.
2) Then flowing into Ethereum (ETH) and blue-chip Tokens in search of higher yields.
3) Eventually entering the small and micro-cap Token market, attracting retail investors chasing 'life-changing returns.'
However, the capital flow patterns of this cycle have undergone significant changes. The current crypto market can effectively be divided into two ecosystems: institutional Tokens and retail Tokens.
2. Institutional ecosystem.
Mainly through spot ETFs accessing BTC and ETH. As of now, funds are primarily flowing into BTC, pushing its price nearly 40% higher than the last all-time high (ATH). As the BTC market approaches saturation, institutional capital may seek higher yields, with ETH ETFs becoming almost the only option. In this transition, a significant amount of capital will shift towards ETH ETFs, and this influx of funds could lead the relatively illiquid ETH market to respond quickly in price (similar to when the ETH spot ETF was initially approved, resulting in a 15% price increase on the same day).
3. ETH rotation effect.
The price rise of ETH 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 upcoming Token season (Alt-Season). Currently, the capital rotation of ETH 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, gradually migrating their gains to higher-risk assets. They realize that from the perspective of 'life-changing returns,' they have missed the best opportunity with BTC and ETH, and thus can only significantly increase their risk appetite.
In the real world, people are struggling: inflation is pressing down on them, 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 these 'rich men's coins' (BTC, ETH, and blue-chip Tokens), downloading Phantom wallets, and diving headlong into the seemingly endless world of 'Memecoins,' hoping to find a 'lottery ticket' that can change their fate. But most will only encounter failure and ultimately exit the crypto space altogether.
1) The flow of funds in the retail ecosystem has completely been overturned:
Funds flow directly into Memecoins, completely bypassing considerations of technology or practicality. Returns are primarily concentrated in the hands of a few experienced 'old hands,' who, like souvenir vendors at tourist spots, wait for new retail investors to arrive, emptying their wallets and tempting them to believe in the dream of overnight wealth ('Look at this case of someone 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 vs player' (PvP) redistribution of wealth, shifting from retail investors to professional scammers. Although Memecoins initially emerged as 'anti-establishment' altcoins launched fairly, they have now transformed into highly manipulated scams: scammers seize most of the allocation at the token issuance and then implement 'rug pulls' or even worse behavior. This game is time-limited, with a finite amount of capital that can be sucked in; once it is drained, funds will seek new destinations.
2) Expectations and impacts.
I expect that the current 'Memecoin casino' will self-consume. 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, it is just a massive game of 'hot potato,' where over 95% of participants will end up with losses.
The impact of capital flow on major Tokens (such as SOL, AVAX, etc.) is that they will require massive venture capital, institutional funds, and retail capital injections to ignite a new round of altcoin rallies. This may occur after the capital overflows from BTC and ETH when institutional and retail whales begin to seek higher-risk assets to accommodate new profits. Recently, whale wallets have begun to net sell BTC.
5. The 'stubborn virus' of GameFi.
During the early GameFi boom of this cycle, many game projects frequently launched 'vapourware' with poor game quality, excessive FDV (fully diluted valuation), useless tokenomics, and numerous other issues. This chaos has damaged the credibility of the GameFi sector.
Today, quality projects that have spent years building and preparing to launch face tremendous challenges 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 launchpads.
Launchpads have nearly disappeared, but survivors may welcome a strong recovery.
Venture capital funds (VCs) have attempted to extract maximum value from retail investors, leading to the breakdown of this model: long lock-up periods, high FDV, predatory centralized exchange (CEX) listing strategies, and exploitative market maker behaviors have left launchpads in a difficult position.
A new model is emerging, showing significant advantages: low FDV, high unlock ratios, and projects without CEX listings far outperforming the old model VC projects. Investing in top launchpads will become key, as these opportunities will become scarcer and the entry barriers higher.
It is certain that just a few projects launching at 50x or 100x will cause retail investors to scramble to buy launchpad 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 possess practicality, representing partial ownership of revolutionary technologies and platforms. The rest of the Tokens are purely speculative games that will ultimately go to zero. However, at the same time, choosing the right project can yield massive returns.
8. Dilution makes the market crowded and difficult to find direction.
In 2020, the number of Tokens in the crypto market peaked at about 10,000. Nowadays, the same number of Tokens is created daily. 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 they are difficult for ordinary investors to identify, especially for those who only have superficial knowledge 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 complex technologies; they only need to see a cute dog wearing a hat, whose only 'function' is to have no function—combined with a 'lottery winning' thrill, that is already enough to attract them.
9. The value output of KOLs is far below the value they extract.
Influencers in the crypto space have degenerated 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 diminished the role of influencers based on real data, as they instead focus entirely on shameless promotion and 'pump and dump' schemes. Be sure to carefully filter out useful information and do not blindly follow these 'false shepherds.'
11. MicroStrategy may become the GBTC of this cycle.
MicroStrategy's ($MSTR) premium over its net asset value (NAV) is growing wildly, reflecting strong demand for Bitcoin from 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. Despite the inevitable calls for a 'super cycle' at the peak of the bull market, what follows will certainly be a significant bear market decline.
For those who can identify these signals, it may become an excellent opportunity to short the market, but it will not occur in the short term.
12. Altcoin season is 'dead', Ethereum is 'dead'... the ultimate contrarian indicator.
The market is filled 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, as well as positions in long-term altcoins (some performing well, some not). Whenever everyone focuses on Bitcoin's rising price and abandons positions in altcoins and Ethereum, it is only when there’s a mad rush to chase BTC at local tops that the altcoin and Ethereum markets will truly kick off.
13. ETF options will bring significant volatility—whether up or down.
On the first day of IBIT's listing, nearly $2 billion in notional options value was traded, most of which concentrated on call options (betting on the price of BTC rising). The sellers of these call options typically hedge by purchasing the underlying ETFs, thereby pushing up prices. This trend may continue to play out over the coming months.
14. Regulatory clarity is a huge positive, eliminating barriers to entry in the crypto space.
In previous cycles, capital entering the cryptocurrency 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 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 looking to invest in crypto startups.
Everything is in place... No one could foresee so many positive 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:
Bitcoin and Ethereum spot ETFs have been approved.
Trump's attitude toward cryptocurrency has significantly changed and is promoting positive regulation.
Trump's comprehensive victory.
SEC Chairman Gary Gensler resigns.
Sovereign entities from various countries purchase Bitcoin.
China once again 'lifts the ban' on cryptocurrency.
The Coinbase and XRP cases have established favorable legal precedents.
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 ETFs have become the largest products 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 to 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 significantly reduced friction and will attract more retail capital, and once the bull market kicks off, the scale of inflows will be immeasurable.
16. Summary.
The development of this crypto bull market is filled with unpredictable factors. However, one thing is always easy to predict in every cycle: the inevitable emotional reactions of retail investors: the latest overhyped project is too good, buy! The old undervalued projects are too boring, sell! Altcoins are dead, buy Bitcoin! Ethereum is not performing, sell!
This emotional reaction always resembles the 'Cramer effect,' perfectly serving as a contrarian indicator. In the end, 95% of retail investors will lose money. Be sure to become a member of that 5%, and reverse thinking is key. Good luck to everyone!
