Markets
Dispersion is defining the current cryptocurrency market
One of the most interesting features of today’s cryptocurrency markets is the high level of dispersion, or the range of returns across different parts of the market.
In today’s liquid markets, sectors focused on infrastructure and technology have significantly outperformed more consumer-oriented categories, such as gaming, metaverse, and entertainment tokens.
The performance of CoinDesk sector indices since November 2021 (the peak of the last bull market) reveals this trend.
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The “range” value, which shows the difference between the highest and lowest cumulative returns at any point in time, highlights the level of dispersion. Dispersion started high in the fourth quarter of 2021 due to a surge in culture and entertainment developments. It then fell in 2022 as the market crashed, correlations increased, and assets traded largely in sync.
However, dispersion has been increasing since 2023, with a significant acceleration in Q4 last year, as currencies and smart contract (infrastructure) platforms have separated themselves from the rest of the market. In 2024, dispersion is high during this period, with tokens in the Culture and Entertainment sector continuing to decline, while BTC, ETH, and other smart contract platform tokens are outperforming.
Let’s take a few examples to illustrate this last point. The current maximum drawdown of the overall market (using the CoinDesk Market Index) has been -33% over this period. Compare that to some of the largest consumer tokens in the Gaming and Culture & Entertainment sectors, including Axie Infinity (gaming), Decentraland and The Sandbox (metaverses), and Apecoin (a token associated with the Bored Ape Yacht Club NFT collection). The maximum drawdowns of these tokens have been -96%, -94%, -96%, and -96%, respectively. They have not participated in the market recovery this cycle.
Another way to visualize dispersion is through the 30-day moving average of the daily standard deviation of returns in CoinDesk’s sector indices. Since the fourth quarter of last year, sector dispersion has been mostly above average. This high level of dispersion indicates that the market is no longer moving in unison, and individual sectors are experiencing different growth trajectories based on their underlying fundamentals and investor interest.
To dive deeper, let’s look at the number of billion-dollar tokens in each sector (sectors are defined by Hack VC) from five years ago versus today. In 2019, currencies dominated the market: BTC and BTC competitors. Today, half of the tokens are in the infrastructure sector (layer 1 and layer 2 blockchain). This sector has seen tremendous growth over the past five years. We also see new sectors emerging. Artificial intelligence, for example, is a relatively new part of the market that brings together two of the most exciting emerging technologies: cryptocurrency and artificial intelligence. Despite the many promises and the hype, today the real advantages exist. Over the next five years, we expect additional sectors and sub-sectors to emerge.
This dispersion and development of new sectors over time is positive for active managers. It indicates increasing market sophistication, with value being rewarded and fundamentals becoming increasingly important. Dispersion also offers significant opportunities to generate alpha. It makes it easier for active managers with alpha to outperform the market, although it also increases the risk of underperformance without a strong strategy.
In this environment, investors need to be more selective and informed about the sectors and projects they invest in. Active management becomes crucial as the market rewards those who can identify and capitalize on trends. These markets are also particularly favorable for investors with a deep understanding of technological advances and the ability to distinguish long-term value from short-term hype.
The information contained herein is for general informational purposes only and does not constitute, and is not intended to constitute, investment advice and should not be used in evaluating any investment decision. Such information should not be considered as accounting, legal, tax, business, investment or other relevant advice. You should consult your own advisors, including your attorney, for accounting, legal, tax, business, investment or other relevant advice, including with respect to any matter discussed herein.
This article reflects the current opinions of the author(s) and has not been prepared on behalf of Hack VC or its affiliates, including any funds managed by Hack VC, and does not necessarily reflect the opinions of Hack VC, its affiliates, including its general partner affiliates, or any other individual associated with Hack VC. Certain information contained herein has been obtained from published sources and/or prepared by third parties and in some cases has not been updated as of the date hereof. While such sources are believed to be reliable, neither Hack VC, nor its affiliates, including its general partner affiliates, nor any other individual associated with Hack VC are making any representations as to their accuracy or completeness and they should not be relied upon as such or form the basis for an accounting, legal, tax, business, investment or other decision. The information contained herein does not purport to be complete and is subject to change, and Hack VC has no obligation to update such information or to make any notification if such information becomes inaccurate.
Past performance is not necessarily indicative of future results. All forward-looking statements contained herein are based on certain assumptions and analyses made by the author in light of his experience and perception of historical trends, current conditions and expected future developments, as well as other factors he believes appropriate under the circumstances. Such statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict.