The cryptocurrency market has seen significant changes, leading many analysts to caution against investing in altcoins.
Historically, bull markets have seen Bitcoin and Ethereum rise first, followed by altcoins. However, current conditions suggest a shift in this pattern.
Why Buying Altcoins Now Is Risky
Quinn Thompson, founder of the crypto hedge fund Lekker Capital, advised against investing in altcoins at this time. He pointed to several indicators of market instability, including high leverage and open interest, a lack of panic-driven buying, and stagnant stablecoin supply.
He believes the market is experiencing increased selling pressure, particularly from venture capital funds needing to raise capital, which leads to more selling than buying. This situation, combined with low summer trading volumes, makes it difficult for altcoins to gain traction.
“I think there is serious cascade risk in crypto, and in particular, expect most altcoins to be taken out back. The market seems to have lost any ability to bounce, even in majors, while at the same time, leverage and open interest remains high,” Thompson said.
Altcoins Market Depth. Source: Kaiko
Thompson identified two primary reasons for his stance. First, the impact of Bitcoin and Ethereum exchange-traded funds (ETFs) and the issue of altcoin supply inflation.
The introduction of Bitcoin and Ethereum ETFs has changed the market structure. In the past, capital would flow from major cryptocurrencies like Bitcoin and Ethereum into altcoins during bull markets. However, with over $50 billion now invested in Bitcoin ETFs, these funds do not have similar mechanisms for investing in altcoins.
This shift has limited the capital available to altcoins, making it harder for them to rise in value. According to Samara Epstein Cohen, Chief Investment Officer of ETF at BlackRock, traditional market participants increasingly focus on Ethereum for tokenization, which further sidelines altcoins.
Read more: How To Invest in Real-World Crypto Assets (RWA)?
Bitcoin ETFs Holdings. Source: CryptoQuant
The rapid launch of new altcoins has also flooded the market, creating significant inflationary pressure. Many projects release large amounts of tokens aggressively, resulting in a supply that far exceeds demand.
Thompson pointed out that there is a lack of demand to support the approximately $3 billion of monthly altcoin supply inflation expected 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 have a constant stream of sell pressure. As we enter an already low-volume summer period, the combination of significant token supply unlocks and venture capitalists’ sell pressure will likely be too strong of 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 effective.
Many altcoins have underperformed Bitcoin in recent months, indicating that the market dynamics have changed.
“In 2020, you go out on the risk spectrum, those things are going to have higher beta to Bitcoin and you just get long all the vaporware and all that stuff goes up. We have not seen that this time. A lot of the altcoin to Bitcoin pairs have just been bleeding out for several months now and it hasn’t really been as simple as just buy whatever vaporware altcoin and you’ll outperform Bitcoin,” Clemente emphasized.
Technical analyst Michaël van de Poppe highlighted that Bitcoin is near or at an all-time high, while most altcoins have not reached their previous peaks. This discrepancy indicates a lack of confidence in altcoins, which continue to struggle in the current market environment, suggesting that the days of easy gains from altcoins may be covered.
Read more: 10 Best Altcoin Exchanges In 2024
Investors should be aware of the heightened risks and consider new conditions before making decisions in the cryptocurrency market.
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