Written by: 10X Research
Compiled by: Wenser, Odaily Planet Daily
Editor's note: As one of the well-known research institutions that has been bullish on BTC, 10X Research recently published its latest views on the recent sharp decline in the market: "The selling pressure caused by the large-scale unlocking of altcoins is dragging down Bitcoin." Subsequently, 10X Research further elaborated on this view in the newsletter. Odaily Planet Daily compiled the article for readers' reference.
Cryptocurrencies fall sharply, altcoins suffer heavy losses
I’m sure the title of this article resonates with anyone who has traded altcoins in 2017 or 2021. We analyzed 115 cryptocurrencies in depth: from their 2024 price highs, these cryptocurrencies have lost an average of about 50%. As discussed below, these losses will continue to worsen unless the liquidity issues in the cryptocurrency market improve.
Bitcoin (down 11%) and Ethereum (down 13%) performed relatively well, likely benefiting from some traders converting altcoins into these two currencies, a phenomenon that also occurred in the previous two market cycles.
10X Research: A look at some cryptocurrency price declines
The key to surviving the altcoin bear market lies in effective risk management.
The massive token unlocking and scarce cryptocurrency liquidity indicators are the main reasons for this altcoin crash.
On May 8, we warned the market that "nearly $2 billion in token unlocks could cause altcoin markets to further shrink over the next ten weeks." The main point of the article was that venture capital funds invested $13 billion in investment funds in the first quarter of 2022, but the market subsequently turned into a bear market. Now, these funds are facing pressure from investors to return funds because artificial intelligence has become a hotter investment area.
VC blockchain investment scale and Bitcoin price trend
Today, altcoins are in the midst of a brutal bear market. Just this year, 73% of these 115 cryptocurrencies reached new highs in March. We had been doing a good job predicting Bitcoin’s outperformance of other cryptocurrencies, including Ethereum, but in early March, the market dynamics changed.
So, what unique changes happened in March?
March is a turning point, and liquidity shortage is beginning to emerge
In early March 2024, the Bitcoin price reached our potential target of $70,000, which we expect to be achieved by the end of the year.
Last year, we accurately predicted Bitcoin’s target of $45,000 by the end of 2023.
In October 2022, we also successfully predicted that Bitcoin would rise to around $63,000 before the halving in 2024. At that time, although we could have obtained a higher price target through quantitative analysis (such as Bitcoin price rising to $125,000), we did not make such an assertion due to the reduction in liquidity in the cryptocurrency market, which affected market performance.
We then gradually turned to a cautious approach and tried to buy a potential bullish breakout above $70,000, but set $68,300 as our “lowest” stop loss. After all, we are traders, not real gamblers.
When Bitcoin falls below $60,000, we lower our stop loss to $62,000 as a criterion for re-entering in case our short-term bearish target of $55,000 is not achieved.
17% of 115 cryptocurrencies (left) reached their price high on March 14, and all are currently in a retracement (right)
There is no doubt that we are at a critical juncture in this bull market.
Understanding and following risk management principles is what separates traders from those who end up holding altcoins and suffer losses, as altcoins tend to fall at the end of a bull run.
At the end of February 2024, Solana’s Meme coin craze broke out.
South Korea’s cryptocurrency market saw daily trading volume surge from $3 billion to $16 billion (twice the value of South Korea’s stock market) after the ruling People’s Power Party made several promises about the cryptocurrency industry ahead of the April 10 national election (including the possibility of allowing a spot Bitcoin ETF). Shiba Inu became the most actively traded coin for several days.
But as time passed in March, the market performance began to slump.
Changes in Bitcoin Funding Rates and Changes in Korean Cryptocurrency Trading Volumes
Behind holding on to the currency and waiting for it to rise, there may be a trap that gradually returns to zero
We occasionally dabble in altcoins, but primarily focus on quality, heavily traded altcoins.
We often use a moving average as a stop loss criterion because it is critical to manage downside risk.
The cryptocurrency market is extremely cyclical and a conventional investment strategy of buy and hold is unlikely to work in the medium to long term. Instead, it is more appropriate to analyze cryptocurrency liquidity and the macro environment and use a trader's mindset (risk management) framework to protect capital so that you are well positioned when the market cycle is on the upswing. This is why our investment approach is generally tactical and we can take a more proactive approach when the market environment turns positive.
On April 4, we introduced the "Bitcoin Self-Reinforcing Mechanism Framework", which shows how Bitcoin ETF inflows fuel positive market sentiment, but at the same time, this liquidity is the result of increased arbitrage liquidity after retail speculative buying that drives up funding rates.
But now, that liquidity is close to drying up, as we can see that despite lower inflation numbers this month, the Bitcoin ETF has seen significant outflows (down $900 million in the past seven trading days).
With Bitcoin funding rates (and CME futures premiums) approaching zero, we may see more liquidations before the next monthly settlement date, when open interest rolls over to the next CME contract cycle (expiring on June 28). While many are now aware that Bitcoin spot ETF liquidity is primarily arbitrage liquidity (we estimate 30%-40%), they are clearly no longer sending positive market signals, and with funding rates close to zero, it is unlikely that this liquidity will return.
In March, Bitcoin ETF inflows were stagnant as the market began to worry about higher inflation data, and most altcoins reached their price highs at that time. The speed of stablecoin minting began to slow down shortly after the Bitcoin halving, failing to provide additional liquidity for altcoins. The subsequent unlocking of $2 billion in various tokens was just the final step.
With a significant increase in trading activity in March and early April, especially Meme-related trades, many traders may have accumulated positions at poor price points. Altcoins ebb and flow, come and go, but Bitcoin is here to stay in the next bull run.
Like previous bull runs, many traders may hold on to altcoins to wait for gains, but smart traders will protect their assets by moving their positions to Bitcoin when liquidity slows.
The difference between retail investors and institutional traders is that institutional risk managers will eventually force institutional altcoin traders to close their positions and stop losses at the appropriate time; while retail investors are unwilling to bear obvious losses and will hold altcoins until they return to zero.
