Historically, bull markets have always started with Bitcoin and Ethereum, followed by altcoins. However, the current situation indicates a shift in this pattern.
Why Buying Altcoins Now Carries Risk
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 gain attention.
“I think there is a serious chain risk in cryptocurrencies, especially as most altcoins are expected to be withdrawn. The market seems to have lost its ability to rebound, even for mainstream currencies, while leverage and open contracts remain high,” Thompson said.
Thompson mentioned two main reasons for his stance. First, the impact of Bitcoin and Ethereum exchange-traded funds (ETFs) and the inflation issue with altcoin supply.
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 surpassing $500 billion, these funds do not have a similar mechanism 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 release of new altcoins has led to market saturation, creating significant inflationary pressure. Many projects have issued large amounts of tokens, resulting in a supply far exceeding demand.
Thompson highlighted the lack of demand to support the expected monthly inflation of around $30 billion for altcoin supply 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 summer with already low trading volumes, the combination of a large token supply unlocking and venture capitalists’ selling pressure could be a tough 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.
In recent months, many altcoins have underperformed compared to Bitcoin, indicating a change in market dynamics.
“When you consider risk in 2020, the beta coefficient of these things was higher than Bitcoin, you just had to long all the false information, and all these things would rise. This time we haven’t seen that. For the past few months, many altcoins have been on a downtrend compared to Bitcoin, and it’s not as simple as buying any false altcoin to outperform Bitcoin,” Clemente emphasized.
Technical analyst Michaël van de Poppe emphasized that Bitcoin is approaching or at historical 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 the new circumstances.