glassnode: The copycat season is coming soon, and funds are rotating

php editor Banana brings the latest analysis report saying that the encryption market is about to usher in the altcoin season. Data shows that funds are rapidly rotating into altcoin projects, and the market structure may undergo major changes. Investors need to remain vigilant and choose investment targets carefully to prevent risks. The latest data from Glassnode demonstrates this trend and provides an important reference for investors. As the altcoin season approaches, the volatility of the crypto market may increase, and investors need to be cautious and increase their risk awareness.

Author: Ding HAN, Alice Kohn

Compiled by: glassnode

Since October last year, our altcoin momentum indicator has shown that investors are increasingly willing to invest capital Turn to the risk curve.

While Bitcoin remains dominant, we have observed a trend of capital beginning to move toward ecosystems such as Ethereum, Solana, Polkadot, and Cosmos.

Looking at Uniswap’s liquidity pool, we find that most funds are still concentrated in the most mature assets. While total value locked (TVL) is moving toward the edge of the risk curve, transaction volume is growing at a relatively slow pace.

1. Anticipating the “Altcoin Season”

With the rise of new spot Bitcoin exchange-traded funds (ETFs), the digital asset market may have entered a bull market. Against this backdrop, we will continue to examine whether capital will flow into altcoins as we mentioned in our Week 4 on-chain report. This issue will pay special attention to the performance of assets that are more marginal on the risk curve.

Assessing capital rotation and flow targets in the altcoin market is key. We will continue to use the Altcoin indicator as a macro indicator, which is designed to assess whether there is positive momentum within the total exchange coin market cap and watch for continued inflows into Bitcoin, Ethereum, and stablecoins. This helps to understand the flow and trends of market funds and provides important reference information for investors.

Our altcoin indicator has been showing positive momentum since October last year, despite a temporary setback during the “sell news” event following the Bitcoin ETF approval. However, it was relaunched on February 4th, showing continued growth potential.

In terms of market capitalization, Bitcoin continues to lead the total market capitalization of the entire digital asset market with a market share of more than 52%. In comparison, Ethereum accounts for 17%, stablecoins account for 7%, and the remaining altcoins account for 24%.

In terms of asset performance, BTC and ETH lead the way, with year-to-date (YTD) increases of 17.6% and 18.2% respectively. We note that after the Bitcoin ETF was approved, ETH began to outperform BTC, a change from its relative underperformance since 2023.

Overall, however, altcoin market capitalization has underperformed, with year-to-date growth less than half that of the two major currencies.

#Another way to track performance is to use each industry’s realized market cap, which aggregates the cost basis value of all coins moved on-chain. From this order, we can better assess the flow of capital within the digital asset market.

Bitcoin is once again clearly in the lead, currently seeing almost $20 billion in monthly inflows.

Ethereum’s inflows tend to lag relatively behind Bitcoin’s, a sign that investors are seeking confidence and confirmation that the digital asset market is growing. In the 2021 cycle, the peak of new capital inflows into BTC occurred 20 days before the peak inflows into ETH.

Altcoins tend to see capital flows with a similar lag after ETH shows strength, 46 days in mid-2021 and 14 days in late 2021.

Apparently capital flows to altcoins have been slower than the rotation between the two major cryptocurrencies, a trend that appears to be playing out again.
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2. Industry rotation

With signs of capital flowing into the two major currencies, the next question is to see how it moves further up the risk curve over time flow. During the last cycle, several new layer-1 ecosystems emerged. Many of these ecosystems compete with Ethereum not only in terms of innovation and attracting users, but also in terms of investment capital.

Therefore, we examined the top five tokens of some selected ecosystems: Ethereum, Cosmos, Polkadot, and Solana, to assess which ones are attracting the most investor interest.

Here we compare the weekly changes in the total market capitalization of the top five tokens in each ecosystem. Over the past 18 months, Solana has exhibited relatively high volatility, particularly on the upside. Polkadot and Cosmos have similar volatility, but the Polkadot ecosystem outperforms the latter

Within the Ethereum ecosystem, we can specify three main areas: DeFi, GameFi, and staking. All three industries have seen capital inflows since the beginning of the year, however the DeFi and GameFi industries have been experiencing relatively large capital outflows in 2022 and 2023.

The GameFi space has seen a reversal this year, with significant inflows starting in October, which coincides with the timing of our altcoin indicator triggering. In contrast, staked tokens have been experiencing positive capital inflows, albeit smaller in absolute terms.

3. Moving on the Risk Curve

To determine whether and to what extent investor interest has shifted outside the risk curve, we can refer to the flow from Uniswap Sex pool data. Since altcoins are typically traded via decentralized exchanges by more crypto-native traders, activity on the earliest established DEXs can serve as a proxy for altcoin trading trends (note: this data reflects Uniswap trading on the Ethereum mainnet).

Altcoin trading interest was very low during the 2022 bear market, but began to increase in mid-2023, driven primarily by the “meme coin madness” trend. Currently, altcoin trading accounts for nearly 12% of Uniswap’s trading volume, which is close to the 17.4% at the peak of the last bull market. In comparison, WBTC and WETH transactions accounted for 47% of trading volume, and stablecoins accounted for 40%.

Liquidity providers on Uniswap tend to monitor the market closely, and changes in the distribution of liquidity among various pools can provide an indication of market trends. By examining the composition of total value locked (TVL) on Uniswap, we observe increased liquidity allocations to tokens outside of the top 50 during alt season. This trend indicates growing investor interest in long-tail coins.

During a bear market, liquidity is primarily provided for the top 50 coins, as this is where the majority of trading volume occurs. The top 10 tokens are mainly composed of WETH, WBTC and stablecoins.

By looking at the TVL percentage change for each token category, we can detect an increase in liquidity provided for the top 10 (5.14%) and top 20 (10.9%) tokens, while those ranked 20 to 50 Tokens have their liquidity removed. This suggests that market demand for long-tail assets has not yet grown significantly.

We will now examine the liquidity pools of the top coins in various areas of Ethereum. This includes assessing the distribution of liquidity across price ranges and observing the evolution of market depth (similar to the assumptions we established in Week 36 of the Chain Report).

The distribution between altcoins and WETH reserves is relatively balanced, with expected upside volatility overall being slightly higher. This suggests that liquidity providers generally have a bullish view on these tokens. GameFi token IMX is an exception.

When looking at the rate of change in the liquidity distribution, we see an increase in market depth in the -5% and 5% ranges, indicating that liquidity providers are preparing for a period of greater price volatility.

UNI is an exception, with market makers increasingly concentrating liquidity around the current price range. This suggests that the UNI token is expected to experience less price volatility, which is not surprising given that it is one of the most mature and stable coins. Now comparing this to trader behavior, we can observe an increase in Uniswap trading volume since October 2023, including for coins outside the top 10.

Contrary to this is the behavior of traders, we can observe an increase in trading volume on Uniswap since October 2023, including coins outside the Top 10. Trading activity among the top 10 to 20 token pairs is also on the rise.

However, the top 20-50 token pairs as well as the top 50 trading activity remained unchanged, which once again validates our previous hypothesis. While liquidity provision is moving toward a higher risk curve, trading volumes have not yet caught up.

##4. Summary and Conclusion

The market momentum of the new Bitcoin ETF and the expectation of a bull market for digital assets have begun to cause a shift in capital flows to altcoins. Our altcoin indicators suggest that the altcoin market is likely to see a more mature and potentially sustained rally, but currently remains relatively concentrated in higher market cap assets.

In the past cycle, the digital asset landscape has changed significantly, with new ecosystems emerging to challenge Ethereum’s dominance. Solana has been the strongest performer over the past year, but there is also activity within the Polkadot and Cosmos ecosystems. Within the Ethereum ecosystem, the top tokens in the staking space have shown the most consistent capital inflows.

The resurgence of altcoin trading on Uniswap, along with liquidity and volume patterns, underscores the increasingly cautious and growing interest in long-tail assets. This initially manifested itself in changing liquidity provision and expectations of high volatility. However, this exists especially within the TVL of the pool, where investor trading volumes have yet to follow suit.

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