Source: Blockworks; Translated by: Deng Tong, Jinse Finance
This is the first part of a series of articles about the current state of the cryptocurrency liquidity market, based on multiple conversations with liquidity funds.
It is an open secret that most cryptocurrency liquidity funds are underperforming.
Liquidity funds operate similarly to traditional hedge funds: choosing market direction, deploying capital, and outperforming benchmarks.
However, unlike hedge funds, the benchmark is not a comprehensive index like the S&P 500. Cryptocurrency liquidity funds aim to outperform Bitcoin.
For example, Bitcoin appreciated by approximately 110% in 2024. Any liquidity fund performing below this benchmark is underperforming or at best, average.
So far this year, Bitcoin has remained stable, while other Altcoin markets have fallen into a trough.
Taking Bitcoin (BTC.D) as an example, its dominance has steadily risen over the past year, currently accounting for 63% of the total cryptocurrency market capitalization of $3.3 trillion.
In contrast, the market cap peak of the previous cycle occurred in November 2021, when BTC's share hovered between 40% and 45%.
Venture capitalists like Jon Charbonneau of DBA even question the value of BTC as a benchmark. Charbonneau stated in the 0xResearch podcast that a more appropriate benchmark might be a weighted average basket of Altcoins like ETH, SOL, and BNB.
This might explain why, despite Bitcoin hovering near historical highs, a distinctly bearish sentiment permeates the cryptocurrency Twitter echo chamber. Many investors seeking higher risk believe Altcoins will rise more than Bitcoin, and thus feel "excluded" from BTC's rally.
Cosmo Jiang of Pantera told me: "The current situation is not great. Most directional liquidity funds likely have a negative view of BTC. For market-neutral liquidity funds, industry average is irrelevant. However, they are also not performing well this year, which means their performance is essentially flat, not positively trending."
Almost all liquidity funds I spoke with believe Bitcoin has positioned itself as an institutional/macro asset, or "digital gold".
"We are at an interesting point in Bitcoin's adoption S-curve, with penetration rapidly increasing due to ETFs and US government strategic reserves. Last year, Bitcoin inflows exceeded Nasdaq's QQQ inflows, which is crazy," Jiang said. "Most players still haven't realized the massive difference in BTC's performance compared to other cryptocurrency markets."
This is not just about the orange coin, which happened to rise 11% this week.
Most liquidity funds are underperforming, affected by the cloud of gloom hanging over the Altcoin market. Arthur Cheong of Defiance Capital told me, the oversupply of existing and soon-to-be-unlocked L1/L2, DeFi, DePIN, AI, and meme coins signals a bleak outlook.
"We expect monthly unlocks of around $1 billion for all Altcoins except ETH over the next two years. The demand for Altcoins is simply not large. The total capital of all cryptocurrency liquidity funds is approximately $10-15 billion," Cheong said.
These structural dynamics also impact liquidity funds focused on market-neutral strategies.
"Even if projects try to sell their locked tokens over-the-counter (OTC) at a 30-40% discount, it's difficult to find buyers. The market generally expects Altcoin prices to plummet," said Min Jung, a Presto Research analyst.
Presto wrote last year that $60 billion in buying pressure would be needed to sustain the prices of the top ten tokens launched in 2024 (STRK, ENA, JUP, ONDO, etc.).
This supply-demand mismatch means liquidity funds must work harder to pick the "right" winners.
The "rising tide lifts all boats (BTC)" phenomenon from the previous cycle no longer exists.
In the second part of this series, we will explore:
How do liquidity funds use fundamentals to adapt to market changes?
Which cryptocurrency areas are liquidity funds focusing on?
Has the four-year cycle ended?
Has the L1 valuation premium disappeared?
Stay tuned for the second part of the 0xResearch newsletter later this week.
