As a renowned research institution that has previously been bullish on BTC, 10X Research recently published a new perspective on the recent market downturn, stating that “the selling pressure caused by the large unlocking of altcoins is dragging down Bitcoin.” Subsequently, 10X Research further elaborated on this viewpoint in their newsletter, which has been translated by Odaily Star Daily for readers’ reference.
Cryptocurrencies have experienced a significant decline, and altcoins have suffered heavy losses. The title of this article resonates with anyone who has traded altcoins in 2017 or 2021. We conducted an in-depth analysis of 115 cryptocurrencies and found that these cryptocurrencies have, on average, fallen by about 50% from their price highs in 2024. As discussed below, unless the liquidity issues in the cryptocurrency market improve, these losses will continue to worsen.
Bitcoin (with a price drop of 11%) and Ethereum (with a price drop of 13%) have performed relatively well, possibly benefiting from traders exchanging altcoins for these two major cryptocurrencies. This phenomenon has also occurred in previous market cycles.
Key to surviving the bear market of altcoins lies in effective risk management. The main reasons for the collapse of altcoins are the large unlocking of tokens and the scarcity of cryptocurrency liquidity indicators.
On May 8th, we issued a warning to the market that “the unlocking of nearly $2 billion worth of tokens in the next ten weeks may further shrink the altcoin market.” The main point of this article is that venture capital funds invested $13 billion in the first quarter of 2022, but the market subsequently entered a sluggish bear market. Now, these funds are facing pressure from investors to return the funds, as artificial intelligence has become a more popular investment field.
Today, altcoins are in a brutal bear market. In this year alone, 73% of these 115 cryptocurrencies reached their all-time high prices in March. We have consistently predicted that Bitcoin will outperform other cryptocurrencies, including Ethereum, in terms of returns. However, the market situation changed in March.
So, what unique changes occurred in March? March was a turning point, and signs of liquidity shortage began to emerge. In early March 2024, the price of Bitcoin reached a potential target of $70,000 that we expected to achieve by the end of the year.
Last year, we accurately predicted a target of $45,000 for Bitcoin by the end of 2023. In October 2022, we also successfully predicted that Bitcoin would rise to around $63,000 before halving in 2024. At that time, although we could have reached higher price targets through quantitative analysis (such as Bitcoin rising to $125,000), the market performance was affected due to the decrease in cryptocurrency market liquidity, so we did not make such assertions.
Subsequently, we gradually adopted a cautious attitude and tried to buy potential breakthroughs above $70,000 for Bitcoin but set $68,300 as our “lowest” stop-loss level. After all, we are traders, not real gamblers. When Bitcoin fell below $60,000, we lowered our stop-loss price to $62,000 as a standard for re-buying in case the short-term target of $55,000 was not achieved.
There is no doubt that we are at a critical moment in this bull market. Understanding and following risk management principles can distinguish traders from those who end up holding altcoins and suffering losses because altcoins tend to fall at the end of a bull market.
In late February 2024, the meme coin frenzy of Solana exploded. The ruling Minjoo Party in South Korea made several promises regarding the cryptocurrency industry on the eve of the national election on April 10th (including the possible approval of Bitcoin spot ETF), resulting in a daily trading volume of the cryptocurrency market in South Korea skyrocketing from $3 billion to $16 billion (equivalent to twice the trading volume of the South Korean stock market). Shiba Inu became the most active coin in those days.
But as time went on, the market performance faltered. Holding onto altcoins and waiting for them to rise may be a trap that gradually leads to zero.
We occasionally dabble in altcoins but mainly focus on high-quality and high-volume altcoins. We usually use dynamic moving averages as stop-loss criteria because managing downward risk is crucial.
The cryptocurrency market is highly cyclical, and conventional investment strategies of buying and holding are unlikely to be effective in the medium to long term. Instead, analyzing cryptocurrency liquidity and the macro environment and using a trader’s mindset (risk management framework) to protect capital to be in a favorable position when the market cycle is in an upward trend is more suitable. That’s why our investment approach is usually tactical, and when the market environment improves, we can adopt a more proactive strategy.
On April 4th, we introduced the “Bitcoin Self-Reinforcing Mechanism Framework,” which shows how inflows of Bitcoin ETFs boost positive market sentiment. However, these liquidity inflows are the result of speculative retail buying that increases arbitrage liquidity. But now, this liquidity is nearing depletion. As we can see, despite lower inflation data this month, Bitcoin ETFs have experienced significant outflows (a decrease of $900 million in the past seven trading days).
With Bitcoin’s funding rate (and CME futures premium) approaching zero, we may see more liquidation activity before the next monthly settlement date, when open positions will be transferred to the next CME contract cycle (with an expiration date of June 28th). Although many people are now aware that the liquidity of Bitcoin spot ETFs is mainly liquidity from arbitrage (we estimate the proportion to be 30%-40%), they no longer convey positive market signals, and these liquidity funds are also unlikely to be reintroduced due to the near-zero funding rate.
In March, as the market began to worry about higher inflation data, inflows of Bitcoin ETFs were also stagnant, and most altcoins reached their price highs at that time. The minting speed of stablecoins slowed down shortly after Bitcoin’s halving, failing to provide additional liquidity for altcoins. The subsequent unlocking of $2 billion worth of various tokens was just the final blow.
With the significant increase in trading activity in March and early April (especially in meme coin-related trading), many traders may have accumulated positions at poorer price levels. The rise and fall of altcoins may continue, but Bitcoin will remain strong in the next bull market.
Like previous bull markets, many traders may insist on holding altcoins and waiting for them to rise, but smart traders will protect their assets by transferring their positions to Bitcoin when liquidity slows down.
The difference between retail and institutional traders is that risk management managers in institutions will ultimately force institutional altcoin traders to close their positions at the appropriate time, while retail traders are unwilling to bear obvious losses and will continue to hold altcoins until they reach zero.
