How To Navigate Crypto Altcoin Market

Before we dive in deeper, let's understand the meaning of the Altcoin market and its cycle

What Is Altcoin (Alternative coin)

An altcoin is essentially a token that belongs to an underlying protocol, application, or another form of cryptocurrency project. Usually, these tokens can be transferred and traded. Onchain coins utilize liquidity pools to facilitate trading, and a certain portion of these coins are listed on exchanges either due to their scale/volume or by directly paying the exchange for listing.

Lifecycle of Alternative Coins

Understanding alternative coins involves grasping how a token is created and who possesses it. It's essential to consider whether venture capitalists and angel investors are holding significant profits while entering a bearish market with limited exit options. This scenario could lead to a decision to avoid the coin or explore short-term opportunities.

The early investor community can significantly influence the success of a token. The initial valuation at which it is launched (i.e., the price at which it becomes accessible) will be greatly affected by its market origins.

Tokens typically originate from either private markets (involving VCs, angels, private pre-sales, etc.) or are directly launched in public markets (through on-chain stealth launches, public pre-sales, ICOs, farms, etc.).

Deals in the private market, which involve VCs and angels, are often structured as an SAFE + token warrant or an SAFT. These arrangements entail a future liquidity event, granting the investor a proportional token allocation at some point in the future (often unspecified). Similar to traditional startups, investors provide funds to a crypto project at a defined valuation in exchange for a stake. Subsequently, the project allocates the token supply to its various stakeholders and launches it to the public at a later date, which is the equivalent of "going public" in the on-chain context.

Here’s an example of what a token distribution can look like from Ethereum L2 zkSync’s token:

Tokens held by the team and investors almost always come with vesting when it’s a legitimate project. In the case of zkSync, both the team and the investors have a one-year cliff (no tokens can be sold) followed by linear vesting for 3 years (0.82% are unlocked per month). ZkSync was founded in 2019. That’s a significant 9-year period from inception through to the end of the token unlocks. Airdrop recipients received their tokens instantly, and in the case of zkSync, it was a fairly generous airdrop for a project of their scale.

So, why does all this matter? All the investors who risked their capital on a risky venture and the team members who put their blood, sweat, and tears into building the company will eventually need to sell these coins to realize the value of their equity. Understanding these “unlock schedules” and their impact on the price of a coin is crucial for longer-term trades.

Once a coin goes from private to public markets, it becomes widely accessible to every type of investor and trader on-chain.

Dumpy’s Law

Without a strong narrative and eager buyers on the other side, coins over a long time horizon trend downwards as the team and private investors divest and public markets lose interest. At best, altcoins rise and fall with major cryptocurrencies, performing well in terms of USD but failing to outperform BTC over a multi-year period. That’s why entering coins at the right valuation and capitalizing on periods of outperformance (which can be substantial in many cases) is essential.

Teams often sell equity on the way up in secondary markets before token launch and also sell locked tokens at a discount “over-the-counter”. That means those team tokens may be hitting the market from participants who are not in the team.

The most conservative approach is to operate under the principles of what we call “Dumpy’s Law”.

Dumpy’s Law states that anything that can be dumped will be dumped. If you operate under Dumpy’s Law, you know the value of the supply the market needs to be able to absorb. The price (or expected price) of a token, along with the supply unlock schedule, will tell you how many new tokens could be sold and over what period. The broader market regime (i.e. uptrend vs downtrend, trading volumes, narrative sentiment) can then let you assess whether the market is prepared to absorb this supply.

Public Markets (aka “Liquid Tokens”)

This is the area of crypto where retail participants are going to have the greatest access. It’s also where all other participants will be looking for “exit liquidity”, making it an extremely competitive market with the potential for both huge gains and huge losses.

Liquid fungible tokens can be traded by anyone on a DEX. Alts trade is based on a combination of narratives, fundamental catalysts, and technical/market-driven factors.

Narratives develop from bullish price action on specific coins. For example, meme coins outperformed all other categories for ~6 months. Coins like PEPE and WIF hitting multiple billions from small market caps, along with the past success of mega-cap coins like DOGE and SHIB, cemented the meme coin narrative.

Over this period, coins of tech projects in DeFi, infrastructure, and other real tech categories underperformed and (we believe) have now bottomed. With certain tech coins like Aave and Sui outperforming for the last month or so, the dominant narrative and focus of traders has shifted accordingly. Whether or not this is organic outperformance is beside the point. What we know is that market participants generally hone in on trending coins with liquidity and volume. A coin’s price performance strongly influences not just its own demand, but the demand for coins in its category as well as adjacent categories.

In other words, AAVE outperforming is good for UNI, CRV, and other DeFi coins and vice versa. SUI outperforming (should it continue) is good for other alt-L1s and for SUI ecosystem coins. PEPE and WIF outperforming would be good for meme coins. This is a core dynamic that drives the crypto market. And. It can be worth it for VCs, liquid funds, market makers, and other well-capitalized market participants to spend some capital and bid strong coins within a category to benefit their portfolio more broadly. Crypto VCs can’t exactly go to their investors and explain to them that the crypto-centric future they sold them on is meme-coins. This is a fundamentally sound reason to believe that altcoins will shine yet again. The alternative would be a death blow to the crypto investment management business!

Managing Information Asymmetry

Attention and the flow of information drive decision-making in crypto, with a single tweet sometimes being enough to change a perspective on a coin/narrative. New entrants can find themselves confused as to why their coins react unexpectedly (such as being sold on the announcement of something bullish after the coin has been trending up for days). Information asymmetry in altcoins is a risk that needs to be managed and, eventually, honed into an advantage.

Below is a diagram we’ve made to help you visualize what you’re up against. This is part of our framework for altcoins and should help regardless of what your strategy is (trading, investing, narratives & catalysts, etc.).

Imagine a piece of developing information such as a project partnership or new product launch. This piece of information flows up and out from the inner circles to the outer ones.

• Core Team: These are the people building the project. It should come as no surprise that the core team of a project is usually going to be where news and data originate from, considering they are the “root cause” of the change. You are not likely to outtrade the core team, but it’s helpful to try and understand their incentives, track record, etc.

• VCs, angels, other employees, 3rd party vendors: This information will then reach private investors and other people who work with the core team, such as marketers and influencers, as part of the course of doing business. It’s normal for key product updates and events to be shared with this group from the core team. Dumpy’s Law usually applies here.

• Friends and associates of inner circles: Once the information crosses into this category, it is likely to be of market interest. The participants just outside the insider circle are unlikely to have free tokens to dump and will seek to position themselves around bullish news. Market activity coming from this layer can be informative, although not always easy to uncover. In more PvP market conditions, market reactions are so weak that even this group can exit liquidity.

• Well-informed participants: This is the layer of the circle that turns information into buying and selling at scale. Well-informed participants find the alpha, bid the coins, form the narratives, and aim to profit along the way. Well-informed participants know enough about the inner workings of the crypto industry to develop an edge even without being the first to know something.

• Uninformed participants: This is where everyone starts but (hopefully) does not stay for long. If you’re new to crypto you’re in this group, even if you don’t believe you are. These are the people waiting for “Twitter influencers” to tell them what to buy and sell and when, while developing no critical thinking of their own.

Note that this flow chart is dynamic — you may float from one layer to another depending on the context. This is why we tell new joiners to focus on a specific area of crypto to master (e.g. DeFi) and then branch out. In situations where you are the uninformed participant, it is best in almost all cases to not invest or trade at all and instead reduce your active risk and work towards becoming a well-informed participant.

If you know where you sit along the info flow spectrum, you will have a better sense of the risk you’re willing to take. Hard, actionable info that moves markets gives you a lot less time, so if you’re close enough to it, you can make a lot more. The ETH ETF announcement was a great example where ETH jumped nearly 20% in a matter of minutes. You had ~5 minutes to position yourself even after such major news came out! It’s not a lot of time, but it's still far slower than TradFi markets.

You can also develop a view around what each layer of the flow chart intends to do (buy/sell/hold) and over what timeframe, and use that to inform your decision-making.

Don’t Fight BTC

The crypto equivalent of “don’t fight the fed” is “don’t fight BTC.” Alts can selectively outperform in tougher market conditions, but eventually, the steam runs out as market participants progressively de-risk or lose capital. Despite crypto having matured over the years, the altcoin market is still highly correlated with BTC. In fact, under the current market regime, you can likely achieve altcoin returns by just trading BTC on 2-3x leverage (not that we are recommending leveraged trading - just for context).

However, there were multiple instances throughout 2024 where you could have massively outperformed by purchasing coins on-chain (mostly in memes). That’s why it’s still important to be plugged into alts. When altcoins do take off, they give you 100%+ returns in a short amount of time.

Scalability Considerations

A key consideration for people with more capital (such as many of our paid subscribers) is scalability. It’s difficult to clip $50K+ in and out of a small or even midcap meme-coin on Solana due to slippage and your influence on holder sentiment. If you’re working with more capital you want to focus on coins with much deeper liquidity than the average memecoin. This is another reason we believe the altcoin market will continue to thrive — whales and funds need a playground too.

Concluding Thoughts

That ended up being a lot longer than we expected when we set out to give a high-level lay-of-the-land for altcoins. We will continue to expand on this topic in future posts. If there are specific aspects of succeeding in the altcoin market you’d like to learn more about paid subscribers can put in content requests.