Article author: Tulip King, MessariCrypto CTO
Article translation: Block unicorn
Preface:
The disgusting behavior of @BanklessVC clearly indicates that we have entered a predatory, PvP (player versus player) market phase. Protect yourself and your income.
I suspect that this round of the cycle has peaked, and the current pullback is natural, as the crypto market is trying to release pain - but this pain may last for a while.
Coins like virtuals, ai16z, and heyanon may hit new all-time highs in the recovery, but they will face the impact of narrative risks - please continue to reassess your worldview.
What is driving the market up?
The reason for the market’s rise is the influx of new funds, which is obvious. From now on, I will discuss the concept of the influx of new funds into the market in connection with the ‘wealth effect’. We should all hope that the crypto industry can create real value (wealth) in the world and share the fruits of monetary expansion. This can be achieved in the following ways:
- Create wealth through innovation (airdrop)
Airdrops have become a powerful mechanism for value redistribution in the cryptocurrency market, creating significant wealth effects and benefiting a wide range of participants. The Uniswap airdrop in September 2020 set the standard by distributing 400 UNI tokens (valued at approximately $1,400 at the time of issuance) to over 250,000 addresses, resulting in a total value exceeding $900 million.
Jito airdrop is an important catalyst in the early stage of the Solana ecosystem’s bull market.
The Jito airdrop in December 2023 distributed 90 million JTO tokens, worth a total of 165 million US dollars. Some users received returns as high as 10,000 US dollars by simply transferring JitoSOL worth 40 US dollars. The Jito airdrop helped drive the growth of Solana’s total value locked (TVL) and promoted an increase in on-chain activities. This wealth effect stimulated the wider adoption and development of the Solana ecosystem, similar to the catalyzing effect of Uniswap’s UNI token on DeFi growth.
The token distribution method of Jupiter further reflects the democratization potential of airdrops. They plan to distribute 7 billion JUP tokens, covering over 2.3 million eligible wallets, making it one of the most widely distributed airdrops in crypto history. Jupiter’s airdrop strategy aims to promote the growth of its ecosystem through incentivizing long-term participation and governance involvement. These airdrops have demonstrated significant efficiency in expanding market participation.
This is what I want to say.
The wealth effect is not limited to direct economic benefits. These airdrops have turned users into stakeholders, enabling them to participate in governance and protocol development. This mechanism creates a virtuous cycle: benefiting participants reinvest wealth in the ecosystem, further driving market expansion and innovation.
These strategic distributions have proven to be powerful market catalysts, sparking broader bull market cycles in their respective fields. Uniswap’s airdrop ignited the DeFi summer of 2020, and its distribution sparked an innovation wave in the decentralized finance sector. Similarly, Jito’s airdrop in December 2023 became a turning point for the Solana ecosystem, driving TVL growth and catalyzing unprecedented on-chain activity. This surge in liquidity and market confidence laid the foundation for the subsequent boom in altcoins, leading to significant growth. These airdrops have effectively served as economic stimuli for the entire ecosystem, creating a self-reinforcing cycle of investment and innovation, defining their respective market eras.
- Appreciation of Wealth (Marginal Buyer)
When the market experiences positive catalysts like strategic airdrops, it attracts previously hesitant participants who bring new capital and enthusiasm. The influx of these marginal buyers creates a virtuous cycle of market expansion and innovation.
Airdrops have triggered positive FOMO, driving deeper market participation from new and old users.
Investors who are on the sidelines, after witnessing successful airdrops and subsequent market momentum, begin to deploy capital, transitioning from observers to active market participants. This shift from cash to crypto assets represents a true influx of new capital into the ecosystem, rather than just a transfer between existing participants.
Large financial institutions are increasingly driving this shift, including BlackRock, Fidelity, and Franklin Templeton, among others, creating products that link traditional finance with digital assets. Their participation helps legitimize the market and provides a more convenient entry point for cautious funds. This expansion creates a positive environment where new participants contribute to the overall market growth.
Unlike zero-sum trading environments, the market stimulated by new participants creates a real wealth effect by expanding liquidity, increasing development activities, and expanding adoption. This positive feedback loop attracts more capital and further drives the growth of the ecosystem.
- Creating Wealth Through Leverage (Multiplier Expansion)
In the late stage of a bull market, leverage becomes the main driving force behind price increases, marking the transition from value creation to value multiplication. As the market enters the price discovery phase, traders increasingly use leverage to amplify their positions, creating a self-reinforcing upward momentum cycle.
Interesting
When Bitcoin enters the price discovery phase above historical highs, the leverage ratio will rise sharply as traders seek to maximize their risk exposure. This creates a chain reaction, where borrowed stablecoins drive further purchases, driving up prices and encouraging more leveraged positions. This multiplier effect accelerates price fluctuations.
The increasing leverage also brings systemic fragility to the market. As more traders take leveraged positions, the possibility of cascading liquidations also increases, especially when borrowed stablecoins become more expensive and harder to obtain.
The rising cost of stablecoin lending is a key indicator of the market entering the final stage. This represents a crucial transition from organic growth to leverage-driven expansion, which does not create new value—only amplifies existing value through debt.
At this stage, the excessive reliance on leverage has created an unstable situation, and sudden price fluctuations may trigger large-scale liquidation, leading to rapid price corrections. This fragility indicates that the bull market is coming to an end, as the system increasingly relies on borrowed funds rather than creating underlying value.
What caused the market to decline?
The market is falling because money is flowing out of the market, which is also obvious. This is essentially a reverse wealth effect, where speculators take advantage of the animal spirits of the market, smart money takes chips off the table to lock in profits, while foolish people are liquidated.
- Wealth is extracted from the market
The encrypted ecosystem regularly undergoes a cycle of value extraction, in which savvy operators design schemes to extract capital from enthusiastic market participants. Unlike productive innovations that allocate value, these schemes systematically remove liquidity from the market through various predatory mechanisms.
The most disgusting part of the Bankless story is that they only spent 2 SOL to consume thousands of SOL from the ecosystem.
The recent launch of Aiccelerate DAO demonstrates this evolution - despite the support of well-known advisors such as the founder of Bankless and industry veterans, the project immediately faced criticism when insiders began selling tokens without a lock-up period after receiving them. Even well-known figures can become tools for rapid value extraction.
Celebrity tokens also reflect this predatory behavior. These projects actually transfer wealth from retail buyers to insiders through malicious smart contracts and coordinated dumping, effectively strangling the altcoin cycle. These extraction events undermine market confidence and suppress the enthusiasm of legitimate participants. Instead of establishing a sustainable ecosystem, they create a cycle of distrust, damaging the maturity of the broader cryptocurrency ecosystem.
I discussed this issue in a previous Messari newsletter.
These schemes do not reinvest profits in the development of the ecosystem, but systematically extract liquidity from the market. The extracted funds usually completely exit the crypto ecosystem, thereby reducing the total available capital for legitimate projects and innovation.
The evolution from obvious scams to complex operations supported by well-known figures represents a worrisome trend. As traditional institutions get involved in rapid value extraction, market participants find it increasingly difficult to differentiate between legitimate projects and sophisticated fraudulent activities.
- Only sellers
BAYC reached the top in just 3 months, does this surprise you?
When the market starts to decline, a key asymmetry emerges - the gap between mature players who realize the market changes and retail investors who still firmly believe in the bull market narrative. At this stage, the market is characterized not by the influx of new capital, but by experienced operators systematically extracting liquidity.
Professional traders and investment firms are beginning to reduce risk exposure while maintaining public optimism. Venture capital firms quietly liquidate positions through over-the-counter trading markets and strategic exits to protect capital while avoiding market impact. This creates a stable illusion even as significant capital has exited the system.
Smart investors are starting to withdraw liquidity from DeFi protocols and trading venues. This subtle but steady outflow of liquidity has resulted in increasingly fragile market conditions, although the impact may not be immediately visible to the casual observer.
It looks like some smart investors are cashing in their chips from the table.
Denial psychology: Although experienced players can profit, retail investors often still believe that a fall is a temporary buying opportunity. This cognitive dissonance is reinforced by the following factors:
The echo chamber of social media maintains a bullish narrative.
Attachment to unrealized gains in bull market
Misinterpreting the mentality of “diamond hands”
Most retail investors missed the best exit point, still holding on during the initial decline, and trying to justify their decisions. By the time the downtrend becomes obvious, a large amount of value has been lost, panic intensifies, and selling pressure increases accordingly.
The steady withdrawal of professional capital has led to continuously deteriorating market conditions, and the impact of each subsequent sell order on prices has become increasingly apparent. The deterioration of market depth is usually unnoticed before significant price fluctuations expose underlying vulnerabilities.
Unlike the newcomers driven by the bull market in the positive environment of New Era, this stage represents pure value destruction, as the capital systematically exits the crypto ecosystem, leaving the remaining participants to bear increasing losses.
- Leverage Burst (Liquidation Chain Reaction)
The final stage of market surrender reveals the destructive impact of excessive leverage, as Warren Buffett’s famous quote goes, ‘Only when the tide goes out do you discover who’s been swimming naked.’ The most dramatic collapse in the crypto market is a vivid embodiment of this principle.
The disintegration began in June 2022 with the collapse of 3AC’s $10 billion hedge fund. Their leveraged positions, including a $200 million exposure to LUNA and a significant exposure to Grayscale Bitcoin Trust, triggered a series of forced liquidations. The fund’s failure revealed a complex network of interconnected loans, impacting over 20 institutions with its default.
The collapse of FTX further illustrates the dangers of hidden leverage. Alameda Research borrowed $10 billion of FTX client funds to create an unsustainable leverage structure, ultimately leading to the collapse of both institutions. Disclosed information shows that 40% of Alameda’s $14.6 billion in assets is held in illiquid FTT tokens, exposing the vulnerability of their leverage positions.
@Saypien_ 的旧研究
These collapses have triggered widespread market contagion effects. The collapse of 3AC has led to the bankruptcy of multiple cryptocurrency lending institutions, including BlockFi, Voyager, and Celsius. Similarly, the collapse of FTX has created a domino effect throughout the industry, with many platforms freezing withdrawals and ultimately filing for bankruptcy.
Continuous liquidation reveals the true face of market depth. When leveraged positions are forcefully closed, asset prices plummet, triggering further liquidation and creating a vicious cycle. This exposes how much of the market’s apparent stability is supported by leverage rather than genuine liquidity.
The ebbing tide has revealed that many institutions that were thought to be mature are actually swimming naked, with inadequate risk management and excessive leverage. The interconnectivity of these positions means that one failure could trigger a systemic crisis, exposing the vulnerability of the entire cryptocurrency ecosystem.
Looking Ahead - Narrative Risk
The title of this article is a bit provocative. My intuition tells me that this is just a healthy, albeit painful, market shakeout. We will bounce back. Especially since the price target for Bitcoin is still quite high - but I have withdrawn my chips from the table, locking in the Bitcoin gains I am willing to bring into the next cycle, if this is really the end. Remember, no one ever went bankrupt from making a profit.
I have written many times about the importance of following market narratives rather than sticking to old currencies. The longer the market downturn, the more the narrative will change. If the market recovers completely tomorrow morning, I expect virtuals, ai16z, and virtuals to continue to prevail. But if the market takes longer to recover, you should pay attention to those newly emerging currencies and see if they can attract new capital inflows.
You should understand that I am telling you not to have a bias towards holding coins, unless you truly have a strong belief. Don’t hold onto your coins until the downturn period. Even if they create new historical highs, I bet you will miss out on a lot of potential returns because you didn’t convert to new coins in time.
The only reason people post Fibonacci charts is to convince themselves (and others) that they can sell at a higher price.
