From a historical perspective, bull markets have always started with Bitcoin and Ethereum, followed by altcoins. However, the current situation indicates that this pattern is changing.
Why Buying Altcoins Now is Risky
Quinn Thompson, founder of the crypto hedge fund Lekker Capital, advises against investing in altcoins at the moment. He pointed out several indicators of market instability, including high leverage and open positions, lack of panic buying, and stagnant stablecoin supply.
He believes that the market is facing increasing selling pressure, especially from venture capital funds needing to raise funds, leading to more selling than buying. This, coupled with low summer trading volumes, makes it difficult for altcoins to attract attention.
“I think there are serious systemic risks in cryptocurrencies, especially as most altcoins are expected to be withdrawn. The market seems to have lost the ability to rebound, even for mainstream currencies, while leverage and open contracts remain high,” Thompson said.
Thompson noted that he holds this position mainly for two reasons. 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 like Bitcoin and Ethereum into altcoins. However, with Bitcoin ETF investments now exceeding $500 billion, these funds do not have similar mechanisms to invest in altcoins.
This shift limits the capital available for altcoins, making it harder for them to appreciate.
Samara Epstein Cohen, Chief Investment Officer of Belad ETF, stated that traditional market participants are increasingly focusing on Ethereum for tokenization, further marginalizing altcoins.
The rapid launch of new altcoins has also flooded the market, leading to significant inflationary pressures. Many projects have issued large amounts of tokens, resulting in a supply far exceeding demand.
Thompson pointed out the lack of demand to support the expected monthly inflation of around $30 billion for altcoins in 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 continuous selling pressure. As we enter the low summer trading volumes, with a combination of a large token supply unlocking and venture capitalists selling pressure, it may be a tough battle for most tokens,” Thompson concluded.
Meanwhile, Will Clemente, co-founder of Reflexivity Research, reflected on how the market is maturing. In 2020, investing in high-beta altcoins was a profitable strategy, as these assets outperformed Bitcoin. However, this approach is no longer effective.
In recent months, many altcoins have underperformed compared to Bitcoin, indicating a change in market dynamics.
“In 2020, if you considered risk, the beta of these things would be higher than Bitcoin, you just needed to go long on all the false information, all these things would rise. This time we haven’t seen that. For several months, many altcoins have been falling against Bitcoin, it’s not just buying any false altcoin that can outperform Bitcoin,” Clemente emphasized.
Technical analyst Michaël van de Poppe emphasized that Bitcoin is nearing or at historic highs, while most altcoins have not reached their previous peaks. This difference indicates a lack of confidence in altcoins, and they continue to struggle in the current market environment, suggesting that the days of easy profits for altcoins may be over.
Before making decisions in the cryptocurrency market, investors should be aware of the increased risks and consider new circumstances.