Historically, bull runs have always started with Bitcoin and Ethereum, followed by Altcoin. However, the current situation suggests that this pattern is shifting.
Why Buying Altcoin Right Now Is Risky
Quinn Thompson, founder of crypto hedge fund Lekker Capital, advises against investing in Altcoin for now. He pointed to several indicators of market instability, including high leverage and open interest, a lack of panic buying, and a stagnant supply of stablecoins.
He believes that the market is facing increasing selling pressure, especially from venture capital funds that need to raise funds, which has led to more selling than buying. This situation, coupled with low trading volume in the summer, has made it difficult for Altcoin to gain attention.
“I think there are serious knock-on risks in crypto, especially with most Altcoin expected to pull back. The market seems to have lost its ability to rally, even for majors, while leverage and open interest remain high,” Thompson said.
Thompson noted that there are two main reasons for his stance. 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 such as Bitcoin and Ethereum into Altcoin. However, with more than $50 billion currently invested in Bitcoin ETFs, these funds do not have a similar mechanism to invest in Altcoin.
This shift limits the capital available for Altcoin, making it harder for them to appreciate. Traditional market participants are increasingly focusing on Ethereum for tokenization, further marginalizing Altcoin, said Samara Epstein Cohen, chief investment officer of BlackRock ETFs.
The rapid launch of new Altcoin also flooded the market, creating huge inflationary pressures. Many projects issued large amounts of tokens, resulting in supply far exceeding demand.
Thompson noted that there is a lack of demand to support the estimated monthly inflation of Altcoin supply of about $3 billion over the next one to two years. While some Altcoin may still perform well, identifying these successful tokens will be more challenging than in previous years.
“Altcoin face relentless selling pressure. As we head into the summer months when trading volumes are already low, the combination of a large token supply unlock and selling pressure from venture capitalists could make this an uphill 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 Altcoin was a profitable strategy as these assets outperformed Bitcoin. However, this approach is no longer valid.
Many Altcoin have underperformed Bitcoin in recent months, suggesting that market dynamics have shifted.
“In 2020, if you think about risk, these things had higher beta than Bitcoin and you just had to long all the fake news and all these things would go up. We didn’t see that this time. Many Altcoin have been going down against Bitcoin for months, and it’s not like you can simply buy any fake Altcoin and outperform Bitcoin,” Clemente stressed.
Technical analyst Michaël van de Poppe highlighted that Bitcoin is close to or at its all-time high, while most Altcoin have yet to reach their previous peaks. This divergence shows a lack of confidence in Altcoin, which continue to struggle in the current market environment, suggesting that the days of easy profits in Altcoin may be over.
Investors should be aware of the increased risks and consider new scenarios before making decisions in the cryptocurrency market.
