The continued dilution of supply from token unlocking, selling pressure from venture funds, a lack of new capital inflows into cryptocurrencies, and seasonal trends have all led to a sharp drop in altcoin prices.
Cryptocurrency majors such as SOL, AVAX, APT, SUI, etc. have experienced corrections ranging from 40% to 70% in the past few months, weighing on altcoin sentiment, while BTC and ETH are only down 15% from this year’s highs.
Markus Thielen noted that venture funds are under pressure to sell tokens to realize profits from investments made in past years.
David Shuttleworth, partner at Anagram, said the lack of capital inflows into the cryptocurrency market “has had a particularly adverse impact on tokens that are about to unlock in large quantities, as well as new tokens and airdrop programs.”
After a massive rally from October to March, the cryptocurrency market is experiencing a healthy consolidation — at least for those invested in the two largest digital assets.
However, for holders of smaller cryptocurrencies, it has been a brutal correction, with the sentiment in crypto social media circles akin to bear market despair.
While bitcoin (BTC) and Ethereum’s ether (ETH) are only 15% below their yearly highs, several crypto majors like solana (SOL) and avalanche (AVAX) are down 40% to 50% from their March highs, while tier 1 challengers sui (SUI) and aptos (APT) have plunged 60% to 70%.
Selling pressure from venture funds, a lack of new inflows into cryptocurrencies and seasonal trends as token supply unlocks have all contributed to weakness in altcoins, a term used to describe cryptocurrencies other than the biggest ones like bitcoin and ethereum.
High dilution
The token supply of many altcoins is continually diluted due to unlocking and distributions years in advance. This is because most tokens are locked up, purchased by early investors, or earmarked for ecosystem development and funding.
For example, the token of Ethereum layer 2 network Arbitrum (ARB) is approaching its all-time low price from September last year, even though its market capitalization has risen from $1 billion to $2.5 billion due to a significant increase in supply.
Another example is Solana, whose supply is increasing by 75,000 tokens per day, worth about $10 million at current prices.
“Unlike stocks, which have seen sustained passive buying via ETF inflows and bond buybacks, the opposite is true for cryptocurrencies (particularly altcoins) — there is relentless selling pressure,” Quinn Thomson, founder of crypto hedge fund Lekker Capital, noted in the X post.
A large part of the selling pressure came from the profits realized by venture capital funds on early investments in projects launched in the past few years.
“VC funds invested $13 billion in the first quarter of 2022 while the market was mired in a bear market,” Markus Thielen, founder of 10x Research, said in a report earlier this week. “As artificial intelligence (AI) has become a more popular topic, these funds are now under pressure from investors to return capital.”
When market interest in smaller, more speculative crypto assets tapers off and trading volumes decline, as they have over the past few months, there isn’t enough demand to absorb this supply shock.
Lack of fresh capital inflows
Liquidity inflows into cryptocurrency markets have also stagnated or even reversed in the past few weeks, as evidenced by the market capitalization of stablecoins, which are primarily used as intermediaries in cryptocurrency transactions.
The combined market capitalization of the four largest stablecoins — Tether’s USDT, Circle’s USDC, First Digital’s FDUSD and Maker’s DAI — has been flat since April after expanding by $30 billion earlier this year, according to TradingView data.
Anagram partner David Shuttleworth cited Nansen data in an X post, noting that stablecoin balances on exchanges (the equivalent of reserve funds for traders and investors) fell by $4 billion to the lowest level since February.
“This has a particularly bad impact on tokens that are about to unlock in large quantities, as well as new tokens and airdrop programs,” Shuttleworth said.
Recently launched blockchain bridge Wormhole {{W}}, yield synthetic dollar protocol Ethena {{ENA}}, and second-layer network Starknet (STRK) have all seen their token prices plummet by around 60% to 70% from their respective highs and are facing billions of dollars worth of token distributions in the coming years.
Seasonal trends are also bearish for small-cap coins, with June typically being a down month for altcoins.
TradingView data shows that the total market capitalization of crypto assets other than BTC and ETH, as measured by the TOTAL.3 indicator, has fallen in June every year for the past six years.
