Author: Alex Botte, CFA, CAIA, partner at crypto-native venture capital firm Hack VC, CoinDesk; Translated by Wuzhu, Golden Finance
One of the most interesting features of the current cryptocurrency market is the degree of dispersion, or the high returns across different parts of the market.
In today’s liquid markets, sectors focused on infrastructure and technology are significantly outperforming more consumer-facing categories such as gaming, the metaverse, and entertainment-related tokens.
The "range" value shows the difference between the maximum and minimum cumulative returns at each point in time, highlighting the degree of dispersion. Dispersion started high in the fourth quarter of 2021 due to a surge in cultural and entertainment-related developments. It then fell in 2022 as markets crashed, correlations rose, and assets largely traded in sync.
However, dispersion has been rising since 2023, picking up significantly in the fourth quarter of last year, with currencies and smart contract platforms (infrastructure) disconnected from the rest of the market. In 2024, dispersion is at a high level during this period, and tokens in the cultural and entertainment space continue to decline, while BTC, ETH, and other smart contract platform tokens outperform.
Let me give you a few examples to illustrate this last point. The current maximum drawdown for the entire market (using the CoinDesk Market Index) is -33% during this period. In contrast, some of the largest consumer tokens in the gaming and entertainment space include Axie Infinity (games), Decentraland and The Sandbox (metaverse), and Apecoin (tokens associated with the NFT series Bored Ape Yacht Club). These tokens have seen their maximum drawdowns at -96%, -94%, -96%, and -96%, respectively. They have not participated in this round of market recovery.
Another way to look at dispersion is through the rolling 30-day average of the daily standard deviation of the CoinDesk sector index returns. Sector dispersion has been mostly above average since the fourth quarter of last year. This higher dispersion suggests that the market is no longer moving in sync, and that various sectors are experiencing different growth trajectories based on their fundamentals and investor interest.
To dig deeper, we looked at the number of billion-dollar tokens in each industry (industries are defined by Hack VC) five years ago compared to today. In 2019, currencies dominated the market: BTC and BTC competitors. Today, half of all tokens are in the infrastructure space (layer 1 and layer 2 blockchains). The industry has seen tremendous growth over the past five-plus years. We are also seeing new industries emerging. For example, AI is a relatively new part of the market that merges two of the most exciting emerging technologies: crypto and AI. While there is a lot of hype and promises, there are real benefits today. In the next five years, we expect to see many more industries and sub-industries emerge.
Diversification and the development of new sectors over time is good for active managers. It is a sign that markets are maturing, value is rewarded, and fundamentals are becoming more important. Diversification also provides significant opportunities for generating alpha. It makes it easier for active managers with alpha to outperform the market, although it also increases the risk of underperformance without a strong strategy.
In this environment, investors must be more cautious and understand the industries and projects they invest in. Active management becomes critical as the market rewards those who can identify and exploit trends. These markets also particularly favor investors who have a deep understanding of technological advances and can discern long-term value from short-term hype.
