Altcoin Investors Face Seasonal Trends and Liquidity Challenges

The TDR Three Key Takeaways regarding Altcoin Investors and Liquidity Issues:

  1. The challenges faced by altcoin investors are mounting despite the relative stability of Bitcoin (BTC) and Ethereum (ETH).
  2. Altcoins face constant dilution as new tokens are released into the market.
  3. In Q1 2022, venture capital funds invested $13 billion amid a bear market, and now face investor pressure to return capital as AI gains popularity.

The challenges faced by altcoin investors are mounting, despite the relative stability of Bitcoin (BTC) and Ethereum (ETH). Major altcoins like Solana (SOL) and Avalanche (AVAX) have seen price drops of 40% to 70%, driven by selling pressure from venture funds, high dilution from token unlocks, and a lack of fresh capital inflows. Seasonal trends also play a significant role, with June historically being a down month for altcoins.

The overall market capitalization and trading volumes in the crypto markets reflect a grim reality for altcoin investors. Unlike Bitcoin and Ethereum, which have shown resilience, altcoins are facing severe liquidity issues. This liquidity crunch is exacerbated by the actions of venture funds. These funds, having invested heavily during the bullish phase of 2021 and early 2022, are now selling off tokens to realize profits, adding downward pressure to already struggling altcoins. Quinn Thomson, founder of crypto hedge fund Lekker Capital, noted in an X post, “Unlike equities which have a constant passive bid from ETF inflows and bond buybacks, crypto, and in particular altcoins, have the opposite – a constant stream of sell pressure.”

One of the primary drivers behind the price drops is the high dilution from token unlocks. Altcoins face constant dilution as new tokens are released into the market. This influx of new tokens dilutes the value of existing holdings, making it harder for prices to recover. Newly launched tokens like Wormhole (W) and Starknet (STRK) have experienced significant price drops and are expected to face ongoing dilution, compounding the bearish sentiment in the market.

The market capitalization of stablecoins has also stagnated, indicating reduced liquidity across the board. Stablecoins are often seen as a measure of the available liquidity in the crypto markets. A stagnant or declining market cap for stablecoins suggests that there is less capital available to flow into other crypto assets, including altcoins. This lack of fresh capital inflows further pressures altcoin prices.

Seasonal trends contribute to the current market dynamics. June has historically been a down month for altcoins, and this year is no exception. The combination of seasonal trends, selling pressure from venture funds, and high dilution rates creates a challenging environment for altcoin investors. Markus Thielen, founder of 10x Research, highlighted the broader context in a report published last week: “Venture capital funds invested $13 billion in Q1 2022, while the market turned into a steep bear market. Those funds are now under pressure from their investors to return capital as artificial intelligence (AI) has become a hotter theme.”  Want to be updated on Cannabis, AI, Small Cap, and Crypto? Subscribe to our Daily Baked in Newsletter!

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