Pantera Investment Guide: Invest in Bitcoin first during a bull market, then invest in altcoins.

Pantera Capital

24-01-19 17:00

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Original Title: "CRYPTO MARKET CORRELATIONS WITHIN BULL MARKETS"

Original Author: Cosmo Jiang & Erik Lowe, Pantera Capital

Original Translation: Deep Tide TechFlow

Pantera Capital recently released a lengthy article that delves into their predictions for the 2024 cryptocurrency market, investment strategies, areas of focus, and trend forecasts.

Due to the length of the article, we have compiled it into different sections according to the content theme.

This article is the first in the full content, written by investment portfolio manager Cosmo and content supervisor Erik, which provides an in-depth analysis of the bull market phase in the cryptocurrency market, particularly the correlation between Bitcoin and other tokens (altcoins).

The author points out that bull markets usually consist of two stages: in the first stage, Bitcoin outperforms other markets; in the second stage, altcoins outperform Bitcoin. The article also explores the reasons behind this phenomenon, such as Bitcoin's liquidity and popularity, as well as investors' exploration of emerging tokens.

Investors often ask us, "What is the correlation between various tokens during a bull market cycle?"

In order to provide some perspective on this, we will analyze the last two cycles, during which the area of investable tokens outside of Bitcoin has occupied a significant market share.

We observe that there are two distinct stages in a bull market cycle. The first stage is the early stage of the bull market, during which Bitcoin often outperforms other parts of the market. The second stage is the later stage, during which altcoins often perform better.

We believe that the performance of Bitcoin in the first stage may be due to several reasons. Firstly, it is the digital asset with the largest issuance and the strongest liquidity in the market. In 2023, the daily trading volume of Bitcoin is 18 billion US dollars, while that of Ethereum is 8 billion US dollars. Secondly, first-time investors usually buy Bitcoin first and then seek investment in other tokens. Bitcoin has a 15-year history, and many people consider it to be synonymous with the industry.

Although some investors' journey is limited to investing in Bitcoin, there are also many who delve deeper into the field of cryptocurrency. There are a large number of investable tokens other than Bitcoin, and the bull market seems to have accelerated the expansion of this field as more entrepreneurs and developers enter this space. The second stage is when investors begin to look for higher-growth tokens that support different use cases, typically driven by new innovations, such as ICOs in 2017-18, DeFi and NFTs in 2020-21.

Below are two charts for two phases, highlighted in gold shading. You will notice that in the first phase of the cycle, the market share of altcoins decreases while the total market value gradually increases, indicating that Bitcoin outperforms the market. During the 60%-70% period of the bull market cycle, the market share of altcoins sharply increases.

The following is the actual return on investment in market capitalization growth for Bitcoin and altcoins, as well as the contribution of each currency to the overall growth of the cryptocurrency market.

During these cycles, Bitcoin consistently outperformed altcoins in the first stage of the bull market. In the second stage, altcoins significantly outperformed Bitcoin. Interestingly, altcoins performed so well throughout the entire cycle that they outperformed Bitcoin in two complete cycles.

Although historically one of the highest sources of investment returns came from the perfect timing of switching from investing in Bitcoin to investing in altcoins during the second phase, this relationship may not always hold true. For any trader, the perfect timing selection is not always realistic.

The most feasible way to generate alpha effect in this field may be to maintain continuous investment, investing in those altcoins that have fundamental reasons to appreciate several times more than Bitcoin.

Our argument is that those protocol-based counterfeit currencies that have product-market fit and are generating real revenue will perform the best in the next cycle, just as people expect in other asset classes such as stocks. Just as not all stocks are created equal, not all tokens are created equal. In the long run, the choice of tokens is crucial because outstanding tokens will depend on specific circumstances, not necessarily tokens in a particular field or based on fickle, short-term speculative rhetoric.

So far in this cycle, Bitcoin has increased by 2.8 times, while altcoins have increased by 1.7 times.

So, how is the situation of VC investment in the encryption market during the cycle?

Since the first quarter of 2022, private financing in the blockchain industry has been slowing down. According to data from The Block, both quarterly financing and transaction volume have decreased.

After reaching its peak in early 2022, the average transaction size has significantly decreased.

It should be noted that these data are based on financing round announcements reported in the news. In my opinion, this often lags behind the actual situation by one to two quarters.

According to our observations at Pantera, we believe that the trough of financing and trading activity may have been last summer. Recently, we have seen a significant rebound in trading activity driven by entrepreneurs who entered during the last bull market, whose businesses have matured and may have found products that fit the market or have been executing the right strategies and are now coming back to raise funds at reasonable valuations.

It may take longer than expected by most people, because during the bull market, many venture capital firms like ours suggested companies to raise one year's worth of operating funds. Therefore, they did not raise funds for two years, but for three years, and now we are starting to see them return to the market.

We believe that this is a great investment opportunity, as trading activity has increased and if the public market continues to rebound, we expect this trend to continue throughout the year.