June 24, 2024
Tokenomics Tips to Navigate the Crypto Dip
Dear Subscriber,
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| By Marija Matic |
Bitcoin (BTC, “A”) and Ethereum (ETH, “A-”) have been on a downward trajectory throughout June. But they notably remain within the trading patterns established in mid-March.
In fact, they are only 17% and 20% down, respectively, from their yearly highs.
This suggests a continuation of the broader trend, rather than a sharp decline. In contrast, altcoins — crypto assets other than BTC or ETH — have experienced significant losses.
Large, top 50 altcoins like Solana (SOL, “B”), Avalanche (AVAX, “B+”) and Cardano (ADA, “B+”) have seen corrections of 40%-70% over the past few months. And smaller altcoins are experiencing even larger drops.
This drastic price adjustment, while notable after a massive run up this year, could be a healthy correction for the market before the next phase of the bull market ensues.
It also presents an opportunity to explore why some cryptocurrencies navigate downtrends more effectively than others.
It's common knowledge that smaller altcoins have lower trading volume and liquidity. That makes them more susceptible to price swings with smaller buying or selling pressure.
However, there are additional forces at play when the market is like this.
Supply Dynamics
In short, supply matters during downturns like this. And that’s why taking a closer look at tokenomics is an important step for all investors.
Tokenomics is the study and analysis of the economic aspects of a cryptocurrency or blockchain project. That includes token distribution, and that can reveal a great deal to investors in volatile markets like this one.
While established altcoins often boast lower inflation rates due to most of their supply already circulating, some can still be vulnerable to price drops during downtrends. This vulnerability stems from the sheer size of their market capitalizations.
Even a small percentage of their total tokens unlocked can translate to a significant amount of new supply in dollar terms. When there's a lack of capital inflow in the market to absorb this influx of new supply, the price can be negatively impacted.
You can see this dynamic in the recent large token unlocks exceeding $100 million each for Chainlink (LINK, “B+”), Arbitrum (ARB, “B-”) and Ethena (ENA, Not Yet Rated).
All three experienced significant price corrections following these events. While LINK lost a moderate 44% from its yearly highs, the newer entrants were hit harder. ENA lost 66% and ARB lost an astonishing 70%.
This highlights the importance of considering not only inflation rates but also the distribution schedule and upcoming token unlocks when evaluating an altcoin's resilience during downtrends.
Newer altcoins often have a larger portion of their supply yet to be unlocked, and these upcoming unlocks can exacerbate price declines during downtrends even further.
With high inflation rates and smaller investor bases, these newer entrants struggle to attract sufficient capital to absorb the influx of new tokens, leading to even steeper price drops, when capital inflows run low … like they are now.
One of the good examples of how less supply works in a coin's favor is BNB (BNB, “C+”), which is down only 22% from its yearly high. BNB is deflationary, since it regulates the supply with a burning mechanism.
This is partly why risk-off behavior favors established coins.
Sure, strong tokenomics can provide some resilience. But investor sentiment plays a significant role during downtrends.
When risk aversion is high, investors tend to gravitate toward established assets.
But not all established projects are equal. The perception of risk also plays a part. And those cryptos perceived as riskier are likely to struggle more in environments like this.
This can leave memecoins — known for their volatility and speculative nature — particularly vulnerable. While these coins rally the most in the uptrend, they see the most significant corrections in the downtrend.
A prime example is Shiba Inu (SHIB, “C+”), a deflationary memecoin, which is down 64%. Other large memecoins are around 60% down as well.
Even the most established memecoin has seen a substantial correction.
Dogecoin (DOGE, “C+”), which ranks as the tenth largest cryptocurrency is down 50%. Despite its size, investors are still weary of this memecoin’s stability in periods of volatility, highlighting the impact of risk perception on price performance.
Outperforming Outliers: Top Coins Weathering the Storm
Beyond BNB mentioned above, there are two other interesting outliers in the top 50 coins by market cap …
Toncoin (TON, “B-”): This coin, related to Telegram messaging app, stands out as one of the few in the top 50 that is weathering the downtrend remarkably well.
It's currently down only about 11% from its all-time high, which it reached nine days ago. It has heavily outperformed Bitcoin in terms of recent price action due to its strong use case and high demand.
I wrote more about TON recently. You can read it here.
Monero (XMR, “C+”): This privacy-focused coin has held its ground remarkably well, currently sitting only 12% below its yearly highs.
Monero's low inflation rate (0.89%) and no token unlocks by VCs contribute to its stability. Some might jokingly call it a "stablecoin" due to its price consolidation over the past two years. But it’s that exact low volatility that makes XMR more attractive for those seeking privacy in their transactions.
But evaluating a coin's tokenomics and resilience isn’t only useful during downturns. Technical analysis also offers valuable insights for identifying potential entry and exit points, as well.
By analyzing price charts, we can see that some coins are exhibiting strong technical signals suggesting they are nearing historical supports and possible reversals.
So, here’s a hint at what I’m seeing: This could be an opportune moment for investors. Particularly considering the launch of ETH ETFs is expected on July 2, which could influence market sentiment.
As I said last week, dollar-cost averaging would be a great strategy to help mitigate the impact of volatility for this summer.
Or, if going for capital gains in this environment isn’t your first-choice strategy, you could also consider liquidity providing for impressive DeFi yields. You can learn more in my latest briefing, Supercharged Yields, which you can watch here.
Best,
Marija Matiฤ
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