Crypto Liquid Funds Struggle as Bitcoin Dominance Hits 63%

Crypto liquid funds are facing significant challenges in outperforming bitcoin this cycle. These funds, which operate similarly to traditional hedge funds by picking market directions and deploying capital to outperform a benchmark, are finding it increasingly difficult to beat bitcoin's performance. Unlike traditional hedge funds, crypto liquid funds are measured against bitcoin, not a composite benchmark like the S&P 500. For instance, bitcoin's appreciation of approximately 110% in 2024 means that any liquid fund performing below this benchmark is considered underperforming or average at best.

Bitcoin has maintained a steady position year-to-date, while the rest of the altcoin market has experienced a significant decline. Bitcoin dominance, measured by BTC.D, has steadily increased over the past year to 63% against a total crypto market cap of $3.3 trillion. This is in contrast to the market cap peak in November 2021, when BTC.D was in the 40-45% range. This dominance has led to a noticeable bearish sentiment among higher-risk investors who are positioned on the thesis that altcoins would surge harder than bitcoin, leaving them "sidelined" from BTC’s rally.

Most directional liquid funds are likely negative against BTC, while market-neutral liquid funds are having a bad year, generally flat on performance, not positive. Practically every liquid fund agrees that bitcoin has situated itself as an institutional/macro asset, or as “digital gold.” This is due to the rising penetration of bitcoin because of ETFs and the US government’s strategic reserve, with bitcoin inflows exceeding Nasdaq’s QQQ inflows last year. Most players still don’t appreciate the nuance that BTC performance is vastly different from the rest of the crypto market.

The faltering performance of most liquid funds is also impacted by the bleak outlook of the altcoin market. The glut of L1/L2, DeFi, DePIN, AI, and memecoins that already exist and are soon to be unlocked spells a bleak outlook. The unlock schedule for all alts, excluding ETH, is estimated to be $1 billion every month for the next two years. There simply isn’t that much demand for altcoins. The total capital by all crypto liquid funds comes up to ~$10-15 billion of capital. These structural dynamics also affect liquid funds specialized in market-neutral strategies. Even when projects try to sell their locked tokens over the counter (OTC) at 30-40% discounts, it’s hard to find a buyer. There’s a broad expectation by markets that altcoins will plunge.

This mismatch in demand and supply means that liquid funds must work harder to pick the “right” winners. The “rising tide (BTC) lifts all boats (altcoins)” phenomenon of past cycles is no more. In the second part of this series, we’ll look at how liquid funds are grappling onto fundamentals to adapt, what crypto sectors are liquid funds looking at, and whether the four-year cycle and the L1 valuation premium are dead.