Over the past year, the performance of altcoins in the crypto market has shown significant divergence. Investment success has depended on a deep understanding of token unlock schedules and market information asymmetry.
If you've traded or invested in the crypto market over the last 12 months, you've likely noticed a common theme: divergent altcoin performance. In other words, the market has matured considerably. The number of altcoins has exploded while the total capital available to purchase these altcoins has remained roughly the same or slightly declined. These factors combine to make altcoin selection a critical factor for success in crypto markets.
We've recently emphasized that crypto markets favor active strategies over passive "buy and hold" approaches when it comes to generating significant alpha. Bitcoin and Ethereum are easily accessible to everyone now. Unless you plan to compete with Citadel and Jane Street, your edge should focus on on-chain altcoins in areas where market participants can most easily enter.
Side note: Ethereum ETFs have shown mediocre performance so far. We believe crypto's inherent reflexivity hasn't disappeared just because ETFs exist. Broad market demand for risk assets like cryptocurrency will positively affect ETF inflows, while violent Bitcoin selloffs will negatively impact ETF inflows. Simply put: You'll see inflows surge at market tops, just like interest in crypto increases when prices rise. There may be some steady institutional buying at value prices (especially for Bitcoin), but retail inflows will react to reflexive price increases, just like in past cycles.
In today's article, we want to provide DeFi readers with frameworks for analyzing and investing/trading altcoins. Note: For this article only, when we discuss altcoins, we exclude memecoins since they require completely different frameworks/approaches we won't cover here.
Understanding the Altcoin Market
Altcoins refer to tokens that function as part of underlying protocols, applications, or other crypto projects. Typically, these tokens are transferable and tradable. On-chain tokens utilize liquidity pools for trading, and some tokens list on exchanges—usually due to size/volume or after paying exchange listing fees.
The Altcoin Lifecycle
Understanding how tokens are created and who owns them is key to analyzing altcoins. Are there venture capitalists and angel investors sitting on large paper gains from weak markets just waiting for small exit opportunities? This could mean either abandoning the token or looking for short-term opportunities.
The early investor base is crucial for a token's success. The valuation at token launch (i.e., the price you can acquire tokens) is significantly influenced by the token issuance market.
Tokens typically come from private markets (venture capital, angel investing, private presales, etc.) or launch directly in public markets (on-chain stealth launches, public presales, ICOs, farming, etc.).
Private market deals involving VCs and angel investors usually execute via SAFE + token warrants or SAFTs—agreements that provide investors with pro-rata token allocations at some future (often undetermined) date. Like traditional startups, investors provide funding to crypto projects at defined valuations in exchange for equity. Later, the project allocates token supply to various stakeholders and launches publicly. This is the on-chain version of "going public."
Take Ethereum L2 zkSync's token allocation as an example:
Source: ZK Nation
Tokens held by teams and investors almost always come with vesting schedules, especially in legitimate projects. In zkSync's case, team and investor tokens have a one-year lockup (no selling) followed by a three-year linear vesting period (0.82% unlocked monthly). zkSync launched in 2019, meaning it could take up to 9 years from project inception until full token unlock. In contrast, airdrop recipients receive their tokens immediately—in zkSync's case, a generous airdrop considering the project's scale.
Why does this matter? All VC investors and team members who've worked hard to build the company eventually need to sell these tokens to realize their equity value. Understanding these "unlock schedules" and their impact on token prices is crucial for long-term trading.
Once tokens move from private to public markets, they become widely accessible to all types of investors and traders.
Dumpy's Law
Without strong narratives and counterparties of frenzied buyers, tokens tend to decline over long time horizons as teams and private investors sell while public market demand wanes. Even in the best scenarios, altcoin performance often mirrors major coins—showing good USD returns but not necessarily outperforming Bitcoin over multi-year spans. Therefore, entering token markets at correct valuations and riding outperformance periods (which can sometimes be extreme) is critical.
Teams often sell equity in secondary markets before token launches and may also sell locked tokens at discounts via "over-the-counter" deals. This means these team tokens could be sold into markets by non-team participants.
The most conservative approach is following what we call "Dumpy's Law."
Dumpy's Law posits that any token that can be sold eventually will be sold. Following Dumpy's Law helps you understand the supply the market must absorb. A token's price (or expected price) and supply unlock schedule indicate how many new tokens might be sold and over what timeframe. The broader market environment (i.e., uptrend vs. downtrend, trading volume, narrative sentiment, etc.) then helps assess whether markets are prepared to absorb this supply.
Public Markets (i.e., "Liquid Tokens")
This is where retail participants gain the most access in crypto markets. It's also where all other participants look for "exit liquidity," making it an intensely competitive space with enormous profit and loss potential.
Liquid fungible tokens can be traded by anyone on decentralized exchanges (DEXs). Altcoin trading combines narratives, fundamental catalysts, and technical/market drivers.
Narratives
Narratives develop from bullish price action in specific tokens. For example, over roughly the past six months, memecoins have outperformed all other categories. Tokens like PEPE and WIF grew from small caps to multi-billion dollar valuations, with past successes like DOGE and SHIB cementing the memecoin narrative.
During this period, DeFi, infrastructure, and other technical token categories underperformed (we believe these tokens have now bottomed). As technical tokens like Aave and Sui outperformed over the past month or so, trader narratives and focus shifted. Whether this performance is organic doesn't matter. We know market participants typically focus on rising tokens with liquidity and trading volume. Token price action strongly influences both its own demand and demand for its category and adjacent token categories.
In other words, AAVE outperforming benefits UNI, CRV, and other DeFi tokens, and vice versa. SUI outperforming (if sustained) benefits other alt-L1 tokens and SUI ecosystem tokens. PEPE and WIF outperforming benefits memecoins. This trend incentivizes venture capital firms, liquidity funds, market makers, and other well-capitalized players to deploy significant capital heavy into certain token categories for profit. Crypto VCs can't just pitch investors that the crypto future is memecoins—this is partly why alts may outperform again. Otherwise, it would deal a severe blow to crypto investment management businesses!
Managing Information Asymmetry
In crypto markets, attention and information flow drive decisions—sometimes a single tweet can alter views on a token/narrative. New investors might find some token reactions confusing (e.g., bullish announcements causing sell-offs after days of upward price action). Managing and leveraging information asymmetry in altcoins presents risks but also opportunities to gain an edge.
Below is our visualization of this challenge—part of our altcoin framework regardless of whether your strategy involves trading, investing, or narrative/catalyst plays.
Visual Explanation:
Imagine evolving information, like a project partnership or product launch, flowing from inner to outer circles.
- Core Team: These are the people building the project. They're undoubtedly the source of news/data as the "root cause" of changes. You likely won't know markets better than core teams, but understanding their incentives and track records helps.
- VCs, Angel Investors, Employees, and Third-Party Vendors: Information reaches private investors and those working with core teams, like marketers and influencers. Core teams often share important updates with this group during business operations. "Dumpy's Law" usually applies here.
- Friends and Acquaintances of Inner Circles: Once information reaches this layer, it may gain market attention. Participants outside insider circles likely won't have free tokens to sell but may position around positive news. Market activity here can provide useful signals, though not always easy to spot. In competitive conditions, even this layer's reactions may be weak, becoming exit liquidity.
- Informed Participants: This layer converts information into large-scale buying/selling. Informed participants seek arbitrage, bid tokens, shape narratives, and profit. They understand crypto's inner workings well enough to gain advantages even without being first to know something.
- Uninformed Participants: This is where everyone starts (but hopefully doesn't stay). If you're new to crypto, you're here—even if you don't think so. These participants wait for "Twitter influencers" to tell them when to buy/sell while lacking independent critical thinking.
Note that this flowchart is dynamic—you may move between layers based on circumstances. This is why we recommend newcomers focus on specific crypto areas (e.g., DeFi) before expanding. While uninformed, it's best to avoid most investments/trades, reduce active risk, and strive to become informed.
Understanding your position in information flows clarifies what risks you're willing to take. Hard information that moves markets often leaves little time—being close to it lets you profit more. For example, ETH ETF approval news drove ~20% ETH gains within minutes. Even after major news, you might have just ~5 minutes to position! While short, this is slower than traditional finance.
You can analyze each layer's goals (buy/sell/hold), timeframes, and use this to guide decisions.
Don't Fight Bitcoin
Crypto's equivalent of "don't fight the Fed" is "don't fight Bitcoin." While altcoins can selectively outperform during tough markets, their performance eventually exhausts as participants de-risk or lose capital. Despite market maturity, altcoins remain highly correlated with Bitcoin. In fact, in current conditions, trading Bitcoin at 2-3x leverage could yield altcoin-like returns (we don't recommend leverage—just illustrating a point).
However, 2024 has seen multiple instances where buying on-chain coins (mainly memecoins) generated massive alpha. This is why altcoins still matter—when they rally, they can deliver >100% returns quickly.
Scalability Considerations
For larger investors (e.g., our paid subscribers), scalability is key. Moving >$50K in small/mid-cap memecoins is difficult due to slippage and holder sentiment impacts. If operating larger capital, you'll want tokens with far-above-average liquidity. This is why we believe altcoin markets will thrive—big money and funds also need playgrounds.
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FAQ
Q: How do I identify promising altcoins early?
A: Focus on projects with strong fundamentals, active development teams, and clear use cases. Track on-chain activity and community engagement.
Q: What's the biggest mistake new altcoin investors make?
A: FOMO buying after huge pumps without understanding tokenomics or unlock schedules. Always research before investing.
Q: How much of my portfolio should be in altcoins?
A: This depends on your risk tolerance. Conservative investors might allocate 10-20%, while more aggressive traders may go higher.
Q: Are memecoins worth considering?
A: While some generate huge returns, they're highly speculative. Only allocate what you can afford to lose and never risk important capital.
Q: How important are token unlock schedules?
A: Extremely important. Large unlocks often create selling pressure. Always check vesting schedules before investing.
Q: Can altcoins outperform Bitcoin long-term?
A: A few might, but most won't. Bitcoin remains crypto's safest bet, with altcoins offering higher-risk/short-term opportunities.