Altcoin bear market: Tough times ahead for traders

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 caused by the large-scale unlocking of altcoins is dragging down Bitcoin." Subsequently, 10X Research further elaborated on this view in the Newsletter.

Cryptocurrencies fall sharply, altcoins suffer heavy losses

I’m sure the title of this article resonates with anyone who has traded altcoins in 2017 or 2021. We analyzed 115 cryptocurrencies in depth: on average, they have lost around 50% from their 2024 price highs. As discussed below, these losses will continue to grow unless liquidity issues in the cryptocurrency market improve.

Bitcoin (-11%) and Ethereum (-13%) performed 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 cryptocurrency price declines

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

The massive token unlocking and scarce cryptocurrency liquidity indicators are the main reasons for this altcoin crash.

On May 8, we warned the market that “nearly $2 billion in token unlocks could cause altcoin markets to further shrink over the next ten weeks.” 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 subsequently turned into a 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 the midst of a brutal bear market. Just this year, 73% of these 115 cryptocurrencies reached new highs in March. We had been doing a good job predicting Bitcoin’s returns to outperform other cryptocurrencies, including Ethereum, but in early March, the market dynamics changed.

So, what unique changes happened in March?

March is a turning point, and liquidity shortages are beginning to emerge

In early March 2024, the Bitcoin price reached a potential target of $70,000 that we expect to reach by the end of the year.

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

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

We then gradually turned to a cautious approach and tried to buy a potential bullish breakout above $70,000, but kept $68,300 as our “lowest” stop loss. After all, we are traders, not real gamblers.

When Bitcoin falls below $60,000, we lower our stop loss to $62,000 as a criterion for re-entering in case the short-term target of $55,000 is not achieved.

17% of the 115 cryptocurrencies (left) reached their price high on March 14, 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 on to altcoins and suffer losses, as altcoins tend to fall at the end of a bull run.

At the end of February 2024, Solana’s Meme coin craze broke out.

South Korea’s ruling People’s Power Party made several promises about the cryptocurrency 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 daily trading volume to surge from $3 billion to $16 billion (twice the volume of the South Korean stock market). Shiba Inu became the most actively traded coin for several days.

But as time passed in March, the market performance was sluggish.

Changes in Bitcoin Funding Rates and Changes in Korean Cryptocurrency Trading Volumes

Behind holding the currency and waiting for it to rise, there may be a trap that gradually returns to zero

We occasionally dabble in altcoins, but primarily focus on quality, heavily traded altcoins.

We often use a moving average as a stop loss criterion because it is critical to manage downside risk.

The cryptocurrency market is extremely cyclical and a conventional investment strategy of buy and hold 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 capital so that you are well positioned when the market cycle is on the upswing. This is why our investment approach is generally tactical and we can take a more proactive approach when the market environment turns positive.

On April 4, we introduced the “Bitcoin Self-Reinforcing Mechanism Framework” which shows how Bitcoin ETF inflows fuel 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, that liquidity is close to drying up, as we can see that despite lower inflation data this month, Bitcoin ETFs have seen significant outflows (down $900 million in the past seven trading days).

With Bitcoin funding rates (and CME futures premiums) approaching zero, we may see more liquidations before the next monthly settlement date, when open interest will roll over to the next CME contract cycle (expiring on June 28). While many people now realize that Bitcoin spot ETF liquidity is primarily arbitrage liquidity (we estimate 30%-40%), they are clearly no longer sending positive market signals, and with funding rates close to zero, it is unlikely that this liquidity will return.

In March, Bitcoin ETF inflows were stagnant as the market began to worry about higher inflation data, and most altcoins reached their price highs at that time. The speed of stablecoin minting began to slow down shortly after Bitcoin completed the halving, failing to provide additional liquidity for altcoins. The subsequent unlocking of $2 billion in various tokens was just the final step.

With the significant increase in trading activity (especially meme coin-related transactions) in March and early April, many traders may have accumulated a lot of positions at poor price points. Altcoins rise and fall, back and forth, but Bitcoin will remain standing in the next bull market.

Like previous bull runs, many traders may hold on to altcoins to wait for gains, but smart traders will protect their assets by moving their positions to 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.