The crypto market is buzzing in the midst of a bullish cycle. With all eyes on Bitcoin’s potential surge to new heights, anticipation grows for the start of altcoin season, an exciting phenomenon of the past.
However, this cycle could diverge from the norm. Altcoin season, characterized by a notable shift in demand and investments from Bitcoin to altcoins, may simply not happen. Several rational factors suggest why this could be the case.
Too Many Altcoins Created Fragmented Liquidity
The main reason why altcoins may underperform compared to BTC is that their market is totally oversaturated, and supply already strongly outweighs demand.
There are more than three million tokens deployed in the cryptocurrency market to date. More than 540 million of them have been launched in the first half of 2024. And the absolute majority being memecoins.
With so many altcoin choices available, there’s fierce competition for investors’ money. It also means that liquidity—the ease of buying or selling an asset without drastically impacting its price—is spread thin across too many coins.
When this happens, individual coins struggle to maintain investor interest and price growth, weakening the overall momentum of the altcoin market.
The negative trend is evident in the numbers: 80% of newly launched coins have lost value and haven’t recovered since their listing day prices.
Additionally, nearly 74% of tokens distributed via airdrops during the recent bull market cycle saw double-digit declines in their market values on the day of their launch.
Project Funding Paradigm Changed
Advancing technologies made token launches easily accessible to everyone. Altcoin creation no longer requires programming skills or substantial capital. Platforms like Pump.fun allow that for as little as 0.02 SOL.
But that’s not the only reason. The rise in new altcoin launches, especially memecoins, is driven by the fundamental shift in how crypto projects are funded.
In 2017, crypto startups and projects heavily relied on initial coin offerings (ICOs) for fundraising. By 2021, the majority turned to private funding and venture capital (VC) firms. VC investments soared, hitting a record $11.93 billion by Q1 2022.
Nearly half of all deals went to pre-seed or early-stage projects, many of which hadn’t even released their tokens yet.
Startups gained access to substantial financial resources, enabling them to expand and attract further investment. VC investors acquired a significant portion of the tokens’ total supply at exclusive discounted prices.
Nothing would be wrong with that, if not for two circumstances. First, a significant portion of VC-backed project tokens allocated to the insiders are locked up for at least a year before gradually entering circulation.
Secondly, due to pre-launch capital inflows, VC-backed tokens often become too expensive even before they’re publicly released. Private capital investments inflate token values, making them less appealing to ordinary retail investors seeking higher profit margins. As a result, the latter turn to more promising alternatives outside VC-backed choices: fairly launched tokens.
Unlike those backed by private capital firms, fairly launched tokens aim to ensure fairness and equal profit opportunity for all investors. They are not allocated to insiders before the public launch, ensuring everyone has an equal chance to acquire tokens simultaneously.
However, these tokens, often memecoins, prioritize hype over transformative goals. They frequently lack long-term fundamentals, utility, and innovative use cases that could innovate and push the crypto market further. Consequently, their demand is driven by hype and short-term profit motives, which are less sustainable over time.
A vicious cycle emerges: VC-backed projects enter with high prices, benefiting early investors but turning away the later ones. In search of better opportunities, ordinary retail flocks to a myriad of unsustainable but higher-profit alternatives.
The market becomes flooded with altcoins, where none gains enough strength to sustain significant growth.
Part of Altcoins Have Already Rallied
However, despite the diluted liquidity in the altcoin market, capital inflows into them are significantly lower in this bull cycle.
The total market value of altcoins, excluding BTC and ETH, is more than 35% lower today than at a similar time in the 2021 mid-bull cycle. Investors put over $980 billion into altcoins back then, whereas this year, it’s only $785 billion.
In the second quarter alone, the altcoin market cap shrank by $576 billion, losing over 33% of its value.
Despite this, at the beginning of this bull cycle, more altcoins than ever outperformed BTC before its own major rally. Tokens representing various narratives – from RWA, artificial intelligence, and privacy to memecoins – successfully pumped and generated returns tens of times higher than BTC.
Such trends have never been as clear in the crypto market before. Historically, altcoins have always reached record highs only at the start of the altcoin season, which typically begins when Bitcoin hits its record price highs and takes off.
Therefore, as capital injections into the altcoin market decrease and supply is at an all-time high, the natural question arises—will we even see a new altcoin season?
Will New Liquidity Be Enough?
Former bull cycle experiences show that fresh liquidity injections positively affect the crypto market, boosting prices. The market surged successfully during the 2021 bull cycle as retail investors became heavily involved.
Nearly one in ten Americans—over 33 million people— then invested their stimulus checks into digital assets, injecting over $39 billion into the struggling crypto economy.
Smart money, mostly VCs, also stepped in, pouring a record amount of $11.93 billion into cryptocurrency projects.
Today, the situation is different. Retail shifted to memecoins and the private capital investments have drastically dropped since their all-time high of early 2022. They only started recovering this year, barely surpassing the $5 billion mark during the first half of 2024.
Furthermore, the potential new source of fresh liquidity, traditional finance (TradFi) investors, have already stepped into crypto, mostly Bitcoin ETFs, pouring nearly $15 billion into them since their emergence in January.
It seems like a miracle would be needed for a sudden influx of new money into the oversaturated altcoin market.
There are certainly some indicators of optimism in this bull cycle. Hopes are pinned on expected US interest rate cuts, the anticipated launch of ETH ETFs, and a planned $14.5 billion distribution to FTX victims later this year.
On the other hand, a large portion of VC-backed tokens’ total supply will only be unlocked and enter circulation in the future, creating selling pressure and directly impacting token prices.
According to Binance Research, nearly $155 billion worth of tokens are expected to be unlocked between 2024 and 2030. This constitutes more than a quarter (27.2%) of the current total altcoin market cap.
The Bottom Line
With this in mind, it is highly doubtful whether new capital injections alone will be enough to revive the altcoin season tradition in the long term.
The crypto market needs a new game-changing idea or use case that promises to transform the market and rekindle enthusiasm among a wide range of investors.
Learn more about how to research the altcoin market:
Altcoin Season: Tips and Tactics for Market Research
Find out more about smart money crypto moves:
Smart Money Under Scrutiny: Is Blockchain Tracker Abusing Trust?
