Markets
Pantera Capital: Altcoins Are Set to Rebound Amid Crypto Market Recovery
In the last number In the newsletter of cryptocurrency-focused investment firm Pantera Capital, Cosmo Jiang, Portfolio Manager (Liquid Strategies), and Erik Lowe, Head of Content, provide insights into the current state and future prospects of the cryptocurrency market. They note that digital asset prices have been declining in the second quarter after a strong start to the year. This pattern of rapid increases followed by periods of consolidation is typical of markets with high volatility, such as digital assets.
Jiang and Lowe explain that the average of the top 400 tokens has seen a significant decline, down 45% in Q2 and down 12% year-to-date as of June 30. They attribute these declines to both macroeconomic factors and crypto-specific issues. In early April, market sentiment shifted due to the realization that high inflation and a strong economy would likely keep interest rates elevated for a longer period. Additionally, concerns of oversupply in the crypto market emerged as the German government began liquidating its $3 billion Bitcoin position and the timing of the $9 billion Mt. Gox distributions were confirmed.
The newsletter notes that long-tail tokens have faced additional pressure from new token launches, which have diverted capital and attention, and from the ongoing vesting of private investors, which has increased selling pressure. Regulatory uncertainty, particularly the SEC investigations into Consensys and Uniswap, has also contributed to market jitters.
Despite these challenges, Jiang and Lowe remain optimistic about the future of digital assets. They note that the market has been limited in breadth, with most tokens significantly underperforming Bitcoin and Ethereum. This trend mirrors the broader stock market where a few major players have outperformed the rest. Nearly 95% of tokens have underperformed Bitcoin and Ethereum, and about 75% are negative for the year, with major subcategories seeing drawdowns of 40-50% in Q2.
Analysts believe that altcoins have underperformed for several reasons: the focus on Bitcoin and Ethereum due to major regulatory approvals, dilution of available capital and attention from new token launches, and market caution toward tokens with large unlocks from private investors.
However, Jiang and Lowe argue that this large-scale sell-off presents an opportunity for discerning investors. They note that many tokens with strong fundamentals and growth prospects are now undervalued, offering attractive entry points as the market begins to recover. They stress the importance of not lumping all tokens together and instead focusing on those with strong fundamentals.
On a positive note, the newsletter points to several green shoots of innovation in the crypto space, including AI-related blockchain protocols, decentralized physical infrastructure (DePIN) networks, and decentralized social platforms. These innovations, coupled with improving fundamentals such as increasing users and on-chain activity, suggest that the market is poised for a recovery.
Jiang and Lowe also point to significant regulatory change in the United States as a major positive development. They note that former President Donald Trump has shifted toward a pro-crypto stance, and recent legislative developments, such as the approval of FIT21 and the approval of Ethereum ETFs, are promising. Analysts believe that pro-crypto political sentiment is gaining traction, which bodes well for the sector.
A lack of regulatory clarity has historically created challenges for the cryptocurrency market, where tokens without clear value propositions have been treated more favorably than those seeking to return value to holders. Analysts say the FIT21 bill begins to address these issues by laying the groundwork for sensible regulations that could foster innovation while protecting investors.
From a macro perspective, recent indicators suggest that inflation is cooling, which could prompt the Federal Reserve to start cutting interest rates. This shift from tight to supportive monetary policy is seen as bullish for early-stage, high-growth technology sectors like cryptocurrencies. With a record $6 trillion in Money Market Fund assets on the sidelines, Jiang and Lowe believe falling yields will push capital back into high-growth assets as rates fall.
Analysts conclude that the market is entering the second phase of the bull market, where fundamentally sound altcoins are expected to outperform expectations. Historically, bull cycles have initially seen Bitcoin dominate, followed by significant gains in altcoins. With Bitcoin’s dominance having increased significantly, they believe the next phase will see broader market participation and solid performance from fundamentally sound tokens.
Featured image via Disinfect