Author: Bary Rahma, Be In Crypto; Translated by: Deng Tong, Golden Finance
Historically, bull runs have always started with Bitcoin and Ethereum, followed by altcoins. However, the current situation suggests that this pattern is shifting.
Why Buying Altcoins Right Now Is Risky
Quinn Thompson, founder of crypto hedge fund Lekker Capital, advises against investing in altcoins for now. He pointed to several indicators of market instability, including high leverage and open interest, a lack of panic buying, and a stagnant supply of stablecoins.
He believes that the market is facing increasing selling pressure, especially from venture capital funds that need to raise funds, which has led to more selling than buying. This situation, coupled with low trading volume in the summer, has made it difficult for altcoins to gain attention.
“I think there are serious knock-on risks in crypto, especially with the expectation that most altcoins will pull back. The market seems to have lost its ability to rally, even for major currencies, while leverage and open interest remain high,” Thompson said.
Thompson noted that there are two main reasons for his stance. First, the impact of Bitcoin and Ethereum exchange-traded funds (ETFs), and the issue of altcoin supply inflation.
The launch of Bitcoin and Ethereum ETFs has changed the market structure. In the past, during bull markets, capital would flow from major cryptocurrencies such as Bitcoin and Ethereum into altcoins. However, with over $50 billion currently invested in Bitcoin ETFs, these funds do not have a similar mechanism to invest in altcoins.
The shift limits the capital available for altcoins, making it harder for them to appreciate. Traditional market participants are increasingly focusing on Ethereum for tokenization, further marginalizing altcoins, said Samara Epstein Cohen, chief investment officer of ETFs at BlackRock.
The rapid launch of new altcoins also flooded the market, creating huge inflationary pressures. Many projects issued large amounts of tokens, resulting in supply far exceeding demand.
Thompson noted that there is a lack of demand to support the estimated monthly inflation of altcoin supply of about $3 billion over the next one to two years. While some altcoins may still perform well, identifying these successful tokens will be more challenging than in previous years.
“Altcoins face relentless selling pressure. As we head into the inherently lower summer months, the combination of massive token supply unlocking and selling pressure from venture capitalists could make it an uphill battle for most tokens,” Thompson concluded.
Meanwhile, Will Clemente, co-founder of Reflexivity Research, reflected on how the market has matured. In 2020, investing in high-beta altcoins was a profitable strategy as these assets outperformed Bitcoin. However, this approach is no longer valid.
Many altcoins have underperformed Bitcoin in recent months, suggesting that market dynamics have shifted.
“In 2020, if you think about risk, these things had higher beta than Bitcoin and you just had to go long all the fake news and all these things would go up. We’re not seeing that this time. Many altcoins have been going down against Bitcoin for months, and it’s not like you can simply buy any fake altcoin and outperform Bitcoin,” Clemente emphasized.
Technical analyst Michaël van de Poppe highlighted that Bitcoin is close to or at its all-time high, while most altcoins have yet to reach their previous peaks. This divergence shows a lack of confidence in altcoins, which continue to struggle in the current market environment, suggesting that the days of easy profits in altcoins may be over.
Investors should be aware of the increased risks and consider new scenarios before making decisions in the cryptocurrency market.