Pantera Capital recently published a long article that provides an in-depth and detailed account of their 2024 crypto market trends, investment strategies, focus areas, and trend predictions.
Since the article is long, we have divided it into different parts according to the content theme.
This article, the first of its kind, written by its portfolio manager Cosmo and head of content Erik, provides an in-depth analysis of the bull phase of the digital currency market, specifically the correlation between Bitcoin and other tokens (altcoins).
The author points out that bull markets usually consist of two phases: the first phase when Bitcoin outperforms the rest of the market; the second phase when altcoins outperform Bitcoin. The article also explores the reasons behind this phenomenon, such as Bitcoin’s liquidity and popularity, and investors’ exploration of emerging tokens.
The following is an excerpt from some highlights of Pantera Capital’s article:
Investors often ask us, “How correlated are various tokens during a bull market cycle?”
To provide some perspective on this, we will analyze two recent cycles in which the investable token space other than Bitcoin has captured significant market share.
We observe that bull market cycles have two distinct phases. The first phase is the early stages of a bull market, when Bitcoin tends to outperform the rest of the market. The second phase is the later phase, when altcoins tend to perform better.
We believe that Bitcoin’s performance during the first phase could be due to several reasons. First of all, it is the digital asset with the largest circulation and the most liquidity on the market. In 2023, Bitcoin’s average daily trading volume was $18 billion, and Ethereum’s was $8 billion. Second, first-time investors often buy Bitcoin first before looking to invest in other coins. Bitcoin has a history of 15 years, and many people believe that Bitcoin is synonymous with the industry.
While some investors' journey is limited to investing in Bitcoin, there are many who delve deeper into the world of cryptocurrencies. The number of investable tokens outside of Bitcoin is huge, and the bull market appears to be accelerating the expansion of this space as more entrepreneurs and developers enter the space. The second phase is when investors start looking for higher growth tokens that support different applications, often driven by new startups, namely ICOs in 2017-18, DeFi and NFTs in 2020-21.
Below is a diagram of the two phases, highlighted in gold shading. You will notice that during the first phase of the cycle, altcoin market share decreases while total market capitalization gradually increases, indicating that Bitcoin is outperforming the market. During the 60%-70% period of a bull market cycle, altcoins’ market share rises dramatically.
Source: "BlockBeats"
Here’s how Bitcoin and altcoins have actually returned in terms of market capitalization growth, and how much each currency has contributed to the overall growth of the cryptocurrency market.
Source: "BlockBeats"
During these cycles, Bitcoin has consistently outperformed altcoins during the first phase of the upcycle. During the second phase, altcoins significantly outperformed Bitcoin. Interestingly, altcoins have performed so well throughout the cycle that they have surpassed Bitcoin in two full cycles.
While historically one of the highest sources of investment returns comes from perfectly timing the switch from investing in Bitcoin to altcoins at the beginning of the second phase, this relationship does not always hold true for any trader. Perfect timing is not a reality.
Perhaps the most viable way to generate alpha in this space is to maintain consistent investment in altcoins that have a fundamental reason to appreciate many times more than Bitcoin.
Our thesis is that those protocol-based altcoins that have product-market fit and are generating real revenue will perform best in the next cycle, as one would expect in other asset classes such as equities . Just like not all stocks are created equally, not all tokens are created equally. In the long run, token selection is crucial, as the tokens that outperform will be case-by-case, not necessarily tokens in a certain sector, nor necessarily based on impetuous, short-lived speculative rhetoric.
So far in this cycle, Bitcoin is up 2.8x and altcoins are up 1.7x.
So, how does VC investing fare during cycles in the crypto market?
Private funding for blockchain has been slowing since the first quarter of 2022. Quarterly funding and deal numbers both declined, according to The Block.
Source: "BlockBeats"
After peaking in early 2022, the average deal size has declined significantly.
Source: "BlockBeats"
It’s important to note that these numbers are based on press release announcements of funding rounds, which in my opinion tend to lag one to two quarters behind reality.
Based on our observations at Pantera, we believe the low point in funding and deal activity may have been last summer. Lately, we've seen a huge uptick in deal activity driven by entrepreneurs who entered during the last bull market, whose businesses have matured and potentially found product-market fit, or who have been executing on the right strategy and are now back with Raise money at a reasonable valuation.
It may take a little longer than most people expect because during bull markets many venture capital firms like ours recommend that companies raise an extra year of working capital. So instead of raising capital for two years, they raised capital for three years and now we're starting to see them come back into the market.
We believe this is a great time to invest as deal activity has increased, and if the public markets continue to rebound, I expect this trend to continue this year.
[Disclaimer] There are risks in the market, so investment needs to be cautious. This article does not constitute investment advice and users should consider whether any opinions, views or conclusions contained in this article are appropriate for their particular circumstances. Invest accordingly and do so at your own risk.
This article is reprinted with permission from: "Rhythm Blockbeats"
Original author: Cosmo Jiang & Erik Lowe, Pantera Capital
Original compilation: Deep Chao TechFlow
