10X Research: Large amounts of token unlocking and lack of liquidity are the main reasons for the collapse of altcoins

Original title: The Altcoin Bear Market: A Harsh Reality for Most Traders

Original source: 10XResearch

Original translation: Wenser, Odaily Planet Daily

Editor's note: As one of the well-known research institutions that has been bullish on BTC, 10X Research recently published its latest views on the recent sharp decline in the market: "The selling pressure brought by the large-scale unlocking of altcoins is dragging down Bitcoin." Subsequently, 10X Research further elaborated on this view in the Newsletter, and Odaily Planet Daily compiled the article for readers' reference.

Cryptocurrency fell sharply, and altcoins suffered heavy losses

I believe the title of this article resonated with everyone who traded altcoins in 2017 or 2021. We analyzed 115 cryptocurrencies in depth: From their 2024 highs, these cryptocurrencies have lost an average of about 50% of their value. As discussed below, these losses will continue to grow unless liquidity issues in the crypto markets improve.

Bitcoin (-11%) and Ethereum (-13%) have held up relatively well, likely benefiting from some traders converting altcoins into these two major currencies, a phenomenon that also occurred in the previous two market cycles.

10X Research: A look at some of the cryptocurrencies’ price declines

The key to surviving the altcoin bear market is effective risk management.

The large amount of token unlocking and scarce crypto liquidity indicators are the main reasons for the altcoin crash.

On May 8, we warned the market that "nearly $2 billion in token unlocking over the next ten weeks could cause the altcoin market to shrink further." The main point of the article was that venture capital funds invested $13 billion in investment funds in the first quarter of 2022, but the market then turned into a sluggish bear market. Now, these funds are facing pressure from investors to return funds because artificial intelligence has become a hotter investment area.

VC blockchain investment scale and Bitcoin price trend

Today, altcoins are in a brutal bear market. And just this year, 73% of these 115 cryptocurrencies reached new highs in March. We have been doing a good job of predicting Bitcoin's return performance compared to other cryptocurrencies, including Ethereum, but in early March, the market situation changed.

So, what unique changes happened in March?

March became a turning point, and the lack of liquidity began to emerge

In early March 2024, the price of Bitcoin reached our potential target of $70,000, which we expect to achieve by the end of the year.

Last year, we accurately predicted a $45,000 target for Bitcoin by the end of 2023.

In October 2022, we also successfully predicted that Bitcoin would rise to around $63,000 before the 2024 halving. At that time, although we could have obtained a higher price target (such as a rise in Bitcoin price to $125,000) through quantitative analysis, we did not make such an assertion due to the reduction in liquidity in the cryptocurrency market, which affected market performance.

Subsequently, we gradually turned to a cautious attitude and tried to buy a potential bullish breakout above $70,000, but set $68,300 as our "lowest" stop loss price. After all, we are traders, not real gamblers.

When Bitcoin fell below $60,000, we lowered our stop loss to $62,000 as a re-entry criteria in case the short-term target of $55,000 is not achieved.

17% of the 115 cryptocurrencies (left) reached a price high on March 14th, and all are currently in a retracement (right)

There is no doubt that we are at a critical juncture in this bull market.

Understanding and following risk management principles is what separates traders from those who end up holding altcoins and suffer losses, as altcoins tend to fall at the end of bull markets.

In late February 2024, Solana’s meme coin craze exploded.

South Korea’s ruling People’s Power Party made several promises around the crypto industry (including the possibility of allowing a Bitcoin spot ETF) in the run-up to the April 10 national election, which caused the country’s cryptocurrency market to surge from $3 billion to $16 billion per day (twice the South Korean stock market’s trading volume). Shiba Inu became the most actively traded coin for several days.

But as time passed in March, the market performance fell.

Bitcoin Funding Rate Changes and Korean Cryptocurrency Trading Volume Changes

Behind holding coins for a rise, there may be a trap of gradually returning to zero

We occasionally dabble in altcoins, but we mainly focus on high-quality altcoins with large trading volumes.

We usually use dynamic averages as stop-loss criteria because it is crucial to manage downside risks.

The cryptocurrency market is extremely cyclical, and the conventional investment strategy of buying and holding is unlikely to work in the medium to long term. Instead, it is more appropriate to analyze cryptocurrency liquidity and the macro environment and use a trader's mindset (risk management) framework to protect funds so that they are in a favorable position when the market cycle is on the rise. This is why our investment approach is usually tactical, and when the market environment turns good, we can adopt a more proactive strategy to operate.

On April 4, we introduced the “Bitcoin Self-Reinforcing Mechanism Framework” which shows how Bitcoin ETF inflows have fueled positive market sentiment, but at the same time, this liquidity is the result of increased arbitrage liquidity after retail speculative buying that drives funding rates higher.

But now, this liquidity is close to being exhausted. As we can see, despite the lower inflation data this month, Bitcoin ETFs have still seen significant outflows (down $900 million in the past seven trading days).

With Bitcoin’s funding rate (and CME futures premium) approaching zero, we may see more liquidation before the next monthly settlement date, when open interest will be transferred to the next CME contract cycle (expiring on June 28). Although many people now realize that the liquidity of Bitcoin spot ETFs is mainly arbitrage liquidity funds (we estimate the proportion to be 30%-40%), they obviously no longer send positive market signals, and since the funding rate is close to zero, it is unlikely that these liquidity funds will flow back.

Most altcoins reached their highs in March, when Bitcoin ETF inflows were stagnant as markets began to worry about higher inflation figures. Stablecoin minting began to slow shortly after Bitcoin's halving, failing to provide additional liquidity to altcoins. The subsequent unlocking of $2 billion in various tokens was just the beginning.

With the significant increase in trading activity in March and early April, especially in meme coins, many traders may have accumulated positions at poor price points. Altcoins will ebb and flow, but Bitcoin will remain a strong contender in the next bull run.

As in previous bull runs, many traders may hold on to altcoins to wait for the rise, but smart traders will protect their assets by moving positions into Bitcoin when liquidity slows.

The difference between retail investors and institutional traders is that institutional risk managers will eventually force institutional altcoin traders to close their positions and stop losses at the appropriate time; while retail investors are unwilling to bear obvious losses and will hold altcoins until they return to zero.

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