By the classic definition, the bear market is here, it is a feature of the crypto asset class. The reasons are macro-driven this time, there are more participants e.g., banks, hedge funds, VCs, and other institutions on the journey. This phenomenon has altered the behavior of other participants like retail newbies, retail HODLers, and miners compared to the last cycle.
There are many more altcoins trading on exchanges ~19,000 to be approximate and most do not have value as even the most ferocious crypto fans would agree. This is now my fourth bear market depending on how one counts it and I have some observations on altcoins the low caps outside the top 100 i.e., outside 100-200, let us not even bother about the ones outside of that range.
A lot of alts will never come back as technology evolves, communities migrate, and market caps dwindle during bear markets. Let us look at some concrete data from the prior cycles and understand the core issues.
Low cap coins produce exponential returns in bull markets, they also bleed exponentially in bear markets. Holding onto a lot makes little sense based on the factual observations.
The 2017-2019 Bear Market
The average return on assets from the market peak to the market bottom was negative 96%. About 199 out of 200 were down 66% and 29 out of 200 coins dropped less than 90%. 11 did not hold their peak even in the bull market and dropped 70% right there.
The top 50 cryptocurrencies are interesting, they were worth 70% more than the small caps mentioned above. 6 of the top 100 altcoins dropped by 99% while only two produced positive returns i.e., BNB and LINK, a few other exchange coins also produced positive returns.
The Bitcoin and Ethereum maximalists have been right when markets hit an extended downward slump. The data has always favored larger market caps, the more your portfolio is skewed towards large caps, the better your capacity to withstand the bear market (not financial advice).
The 2021-22 Bear Market
Data also indicates that altcoins do not die but hang around for the trader party, small caps do not rebound as hard, and chances of a rebound diminish with the length of these bear runs. Technologies change, communities migrate, investors diversify and tokenomics innovate but people running those protocols do not change as much.
In this bear run themes have dominated, the decimation of Layer 1s down 80%, Defi 83%, and others down 88% are all in the same range. DeFi 1.0 has laid the foundation but not made it, but DeFi is here to stay with newer players ready to replace the current cohort. The Layer 1 protocols with poor technology but viable ecosystems e.g., Solana will survive, yet may not revive quickly.
Ethereum and Cardano have stood the test of time, they have viable ecosystems and despite the price, the decline will survive and revive. Near protocol and Avalanche may also have crossed the chasm and we will see them rebound – it is goodbye to the rest of the older folks and time to welcome the ones with value and ability to inject fundamentals into the protocol and build the ecosystem.
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Revival Expectations
No one has a crystal ball on price action, but there are data, facts, and logical indicators that can help us make informed decisions. Let us examine them:
§Ecosystems drive economic value, and the ability to attract sound projects building on the protocol or project will subsume minor technical advantages
§Growth of developers and projects building useful decentralized applications are key. Not everything built on every protocol drives economic value – projects that build for value, not for the sake of it will survive and revive
§BUIDL is expensive, and funding of the projects is key to watch. As much as people dislike VCs in Web3, they are at least one dimension of proof of investment in economic value.
§Web3 needs Web2, practical use cases helping reap the benefits of Web3 creating exponential impact is necessary
§Hype and narratives are less important, projects which cannot inject long-term fundamentals will fade.
§The market does not have room to accommodate dozens of Layer 1 protocols, those with existing ecosystems and funding will prevail over others. 20% of the Layer 1 protocols will drive 80% of the value
§Age of the project matters, if a team has not created an economic value-driving ecosystem in 2-3 years from inception. The chances of doing so are minimal as the bear market unfolds.
There are a lot of projects building for value and have created thriving ecosystems or utilities e.g., Polygon, Chainlink, Avalanche, Near, and even Solana (1000+ dApps, even with unstable technical posture), etc. amongst several others (impossible to name all) – but the TLDR is focus on ecosystem and value builders, not the ones that harp on minor technical advantages, want to create hype or create narratives without value being accrued to the protocol.
The biggest bull run is yet to happen, many of these low caps will get flushed out and new value-creating projects will emerge. The risks and opportunities are now threaded on economic value, not hype.
Concluding Thoughts
The low caps touted as a bargain by many influencers and YouTubers can look awfully tempting promising incredible returns, but mathematics and analysis suggest otherwise. The new projects have delivered 10-15X higher returns than older altcoin projects hanging around.
It is the same old theme, the old fades while the new emerges, fundamentals thrive, and stronger projects attract better returns. This is not financial advice, but mere observations based on spending a decade across many bull and bear markets, please do your own research and arrive at your own conclusions.
