Crypto majors such as SOL, AVAX, APT, and SUI have seen corrections of 40% to 70% in recent months, weighing on altcoin sentiment, while BTC and ETH are only down 15% from their yearly highs.
Venture funds are under pressure to sell tokens to make profits on investments made in recent years, noted Markus Thielen.
The lack of capital inflows to cryptocurrency markets “has particularly negative implications for tokens with large upcoming and new breakouts [tokens] and air launch programs,” said Anagram partner David Shuttleworth.
The cryptocurrency market is going through a healthy consolidation after a massive rally from October to March, at least for those invested in the two largest digital assets.
For those holding smaller cryptocurrencies, however, this is a brutal correction, with sentiment in crypto social media circles resembling bear market desperation.
While bitcoin (BTC) and Ethereum ether (ETH) are just 15% below their yearly highs, several crypto majors like solana (SOL) and avalanche (AVAX) are down 40% to 50% from March peaks, while Tier 1 challengers sui (SUI) and aptos (APT) have fallen 60% to 70%.
Selling pressure from venture funds as the supply of unlocked tokens expands, lack of new inflows into cryptocurrencies, and seasonal trends have contributed to weakness in altcoins, a term used to describe cryptocurrencies as well as cryptocurrencies. larger ones like bitcoin and ether.
High dilution
Many altcoins experience a constantly diluting token supply through unlocks and distributions scheduled for years to come. This is because most tokens are locked, purchased by early investors or earmarked for ecosystem development and subsidies.
For example, the Ethereum layer-2 network’s Arbitrum (ARB) token is nearing its all-time low since last September, even as its market cap has surged from $1 billion to $2.5 billion due to a massive increase in its supply.
Another example is solana, whose supply increases by 75,000 tokens every day, worth around $10 million at current prices.
“Unlike stocks which have a constant passive supply from ETF inflows and bond buybacks, cryptocurrencies, and particularly altcoins, have the opposite: a constant flow of selling pressure,” Quinn Thomson, founder of crypto hedge fund Lekker Capital, noted in a post
A significant part of the selling pressure comes from venture capital funds making profits on their initial investments in projects launched in recent years.
“Venture capital funds invested $13 billion in the first quarter of 2022 as the market turned into a bear market,” Markus Thielen, founder of 10x Research, said in a report earlier this week. “These funds are now under pressure from their investors to return capital as artificial intelligence (AI) has become a hotter topic.”
When the market’s appetite for smaller, more speculative cryptocurrencies is waning and trading volumes are declining – as in recent months – there is not enough demand to absorb this supply shock.
Lack of new inflows
Liquidity inflows to cryptocurrency markets have also stopped or even reversed in recent weeks, as evidenced by the market value of stablecoins, which are primarily used as an intermediary for cryptocurrency trading.
The combined market capitalization of the four largest stablecoins – Tether’s USDT, Circle’s USDC, First Digital’s FDUSD and Maker’s DAI – has remained stable since April following a $30 billion expansion earlier this year, according to TradingView data.
Stablecoin balances on exchanges – which translates to dry powder for traders and investors – fell by $4 billion to the lowest level since February, Anagram partner David Shuttleworth pointed out in a X post citing Nansen’s data.
“This has particularly negative implications for tokens with large upcoming and new unlocks [tokens] and air launch programs,” Shuttleworth said.
Recently launched tokens of blockchain bridge Wormhole {{W}}, synthetic dollar yield protocol Ethena {{ENA}}, and layer-2 network Starknet (STRK) have all plunged approximately 60%-70% from their respective highs and face billions of dollars of token distribution over the next few years.
Seasonal trends have also been bearish for smaller tokens, with June usually being a bearish month for altcoins.
Data from TradingView shows that the aggregate market capitalization for crypto assets excluding BTC and ETH, captured by TOTAL.3, has seen a decline every June for the past six years.
This month is on track to be no exception, with TOTAL.3 down 11% so far this month.
