Markets
Dispersion Defines Today’s Cryptocurrency Market
One of the most interesting features of today’s crypto markets is the high level of dispersion, or the range of returns between different parts of the market.
In today’s liquid markets, infrastructure and technology-focused sectors have significantly outperformed more consumer-facing categories like gaming, metaverse and entertainment tokens.
The performance of CoinDesk sector indices since November 2021 (the peak of the last bull market) reveals this trend.
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The “range” value, which indicates the difference between the maximum and minimum cumulative returns at each point in time, highlights the level of dispersion. Dispersion started at a high level in Q4 2021 due to a surge in cultural and entertainment developments. It then fell in 2022 as the market collapsed, correlations increased, and assets traded largely in sync.
However, dispersion has been increasing since 2023, with a significant recovery in Q4 last year, with currencies and smart contract platforms (infrastructure) breaking away from the rest of the market. In 2024, dispersion is at its highest level over this period, with culture and entertainment tokens continuing to decline, while BTC, ETH and other smart contract platform tokens outperform.
Let’s look at a few examples to illustrate this last point. The current maximum drawdown of the overall market (using the CoinDesk Market Index) has been -33% over this period. Compare this to some of the largest consumer tokens in the gaming and culture and entertainment sectors, including Axie Infinity (gaming), Decentraland and The Sandbox (metaverses), and Apecoin (the token associated with the Bored Ape Yacht Club NFT collection). The maximum drawdowns for these tokens have been -96%, -94%, -96%, and -96%, respectively. They have not participated in the market recovery during this cycle.
Another way to look at dispersion is to use the 30-day moving average of the daily standard deviation of CoinDesk sector index returns. Since the fourth quarter of last year, sector dispersion has generally been higher than average. This high level of dispersion indicates that the market is no longer moving in unison, and that different sectors are experiencing different growth trajectories based on their underlying fundamentals and investor interest.
To dig deeper, we look at the number of multi-billion dollar tokens in each sector (sectors are defined by Hack VC) five years ago compared to today. In 2019, currencies dominated the market: BTC and its competitors. Today, half of the tokens are in the infrastructure sector (layer 1 and layer 2 blockchains). This sector has seen massive growth over the last five years. We also see new sectors emerging. AI, for example, is a relatively new part of the market that brings together two of the most exciting emerging technologies: crypto and AI. While there is much hype and promise, real benefits already exist. Over the next five years, we expect new sectors and sub-sectors to emerge.
This dispersion and development of new sectors over time is positive for active managers. It indicates increasing sophistication in the market, with value being rewarded and fundamentals becoming increasingly important. Dispersion also provides significant opportunities for alpha generation. It makes it easier for active managers with alpha to outperform the market, but it also increases the risk of underperformance without a solid strategy.
In this context, investors must be more selective and better informed about the sectors and projects in which they invest. Active management becomes crucial, as the market rewards those who know how to identify and capitalize on trends. These markets are also particularly favorable to investors who have a deep understanding of technological advances and the ability to distinguish long-term value from short-term hype.
The information contained herein is provided for general information purposes only and does not constitute investment advice and should not be relied upon in evaluating any investment decision. This information should not be relied upon for accounting, legal, tax, business, investment or other advice. You should consult your own advisors, including your own attorney, for accounting, legal, tax, business, investment or other advice, including with respect to anything discussed in this document.
This article reflects the current views of the authors and is not written on behalf of Hack VC or its affiliates, including funds managed by Hack VC, and does not necessarily reflect the views of Hack VC, its affiliates, including its sponsored affiliates, or any other person associated with Hack VC. Some of the information contained herein has been obtained from published sources and/or prepared by third parties and, in some cases, has not been updated as of the date of this document. While these sources are believed to be reliable, neither Hack VC nor its affiliates, including its sponsored affiliates, nor any other person associated with Hack VC makes any representation as to their accuracy or completeness, and they should not be relied upon as such or used as the basis for any accounting, legal, tax, business, investment or other decision. The information contained herein does not purport to be complete and is subject to change and Hack VC has no obligation to update this information or to provide notification if such information becomes inaccurate.
Past performance is not necessarily indicative of future results. Forward-looking statements made in this document are based on certain assumptions and analyses made by the author in light of its experience and its perception of historical trends, current conditions and expected future developments, as well as other factors it believes are appropriate in the circumstances. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict.