The crypto market five years ago was actually healthier than it is now
- Core Viewpoint: Arca's Chief Investment Officer, Jeff Dorman, believes the current crypto market investment environment has deteriorated. The core issue lies in industry leaders mistakenly bundling all crypto assets as macro trading tools, leading to extremely high correlation and a loss of differentiation among assets. He calls for a return to focusing on the essence of equity-like tokens that can generate cash flow (such as DePIN, DeFi).
- Key Elements:
- Market Status: Despite strong blockchain infrastructure and regulatory environment, the performance returns of crypto assets are highly convergent. Since the flash crash in October 2023, the decline across different sectors has been almost indistinguishable, with extremely low investment dispersion.
- Historical Comparison: The 2020-2021 market exhibited clear sector rotation and performance differentiation. Diversified portfolios could effectively smooth returns and reduce correlation, forming a stark contrast with the current market.
- Industry Misguidance: Industry "gatekeepers" (such as exchanges, asset management firms) overly focus on Bitcoin and macro narratives, neglecting other asset classes and broadly categorizing all non-Bitcoin assets as "altcoins," hindering fundamental analysis.
- Fundamental Solution: The industry should emulate the traditional ETF sector, recognizing that "tokens" are merely a form of securities packaging, and that their internal structure (such as cash flow, business model, sector) is key to valuation. It should guide investors to focus on equity-like assets that generate revenue, such as DePIN and DeFi.
- Opportunity Window: There exists a traditional fiduciary asset market exceeding $600 trillion, whose investors prefer assets that generate cash flow. This is the target demographic the crypto industry should focus on educating and attracting.
Original Author: Jeff Dorman (Arca CIO)
Original Compilation: TechFlow
Introduction: Is the crypto market becoming increasingly dull? Jeff Dorman, Chief Investment Officer of Arca, writes that despite infrastructure and regulatory environments being stronger than ever, the current investment climate is the "worst in history."
He sharply criticizes the failed attempts by industry leaders to forcibly transform cryptocurrencies into "macro trading tools," leading to extreme convergence in correlations across asset classes. Dorman calls for a return to the essence of "tokens as securities wrappers," focusing on equity-like assets with cash flow generation capabilities such as DePIN and DeFi.
At a time when gold is surging while Bitcoin remains relatively weak, this in-depth reflective article provides an important perspective for re-examining Web3 investment logic.
Full text as follows:
Bitcoin is Facing an Unfortunate Situation
Most investment debates exist because people operate on different time horizons, so they often "talk past each other," even though technically both sides can be correct. Take the gold vs. Bitcoin debate: Bitcoin enthusiasts tend to say Bitcoin is the best investment because its performance over the past 10 years has far outstripped gold's.
Caption: Source TradingView, Bitcoin (BTC) vs. Gold (GLD) returns over the past 10 years
Gold investors, on the other hand, tend to believe gold is the best investment and have recently been "gloating" over Bitcoin's weakness, as gold has significantly outperformed Bitcoin over the past year (the same goes for silver and copper).
Caption: Source TradingView, Bitcoin (BTC) vs. Gold (GLD) returns over the past 1 year
Meanwhile, over the past 5 years, gold and Bitcoin have delivered almost identical returns. Gold tends to do nothing for long stretches, then skyrockets when central banks and trend followers buy; whereas Bitcoin tends to have sharp rallies followed by significant crashes, but ultimately still trends higher.
Caption: Source TradingView, Bitcoin (BTC) vs. Gold (GLD) returns over the past 5 years
Therefore, depending on your investment horizon, you can win or lose almost any argument about Bitcoin versus gold.
Even so, it's undeniable that recently gold (and silver) have shown strength relative to Bitcoin. To some extent, this is somewhat comical (or pathetic). The largest companies in the crypto industry have spent the past 10 years trying to cater to macro investors rather than true fundamental investors, only for those macro investors to say, "Never mind, we'll just buy gold, silver, and copper." We have long called for the industry to shift its mindset. There are over $600 trillion in fiduciary assets, and the buyers of these assets are a much stickier investor base. There are many digital assets that look more like bonds and stocks, issued by companies that generate revenue and conduct token buybacks, yet market leaders have, for some reason, decided to ignore this token sub-sector.
Perhaps Bitcoin's recent poor performance relative to precious metals will be enough for major brokers, exchanges, asset managers, and other crypto leaders to realize that their attempt to turn cryptocurrencies into an all-encompassing macro trading tool has failed. Instead, they might start focusing on and educating that $600 trillion pool of investors who are inclined to buy cash-flow-generating assets. For the industry, it's not too late to start paying attention to quasi-equity tokens that carry cash-flow-generating tech businesses (like various DePIN, CeFi, DeFi, and token issuance platform companies).
Then again, if you just keep moving the "finish line," Bitcoin is still the king. So, more likely than not, nothing will change.
Asset Differentiation
The "good old days" of crypto investing seem like a distant memory. Back in 2020 and 2021, it seemed like every month brought a new narrative, sector, use case, and new token types, with positive returns coming from all corners of the market. While blockchain's growth engines have never been stronger (thanks to legislative progress in Washington, stablecoin growth, DeFi, and RWA tokenization), the investment environment has never been worse.
A sign of a healthy market is dispersion and low cross-market correlations. You want healthcare and defense stocks to move differently from tech and AI stocks; you want emerging market equities to move independently of developed markets. Dispersion is generally seen as a good thing.
2020 and 2021 are largely remembered as "everything goes up" markets, but that wasn't entirely true. It was rare to see the entire market move in lockstep. More often, one sector would rise while another fell. When the gaming sector surged, DeFi might be falling; when DeFi surged, "dino-L1" tokens might be falling; when the Layer-1 sector surged, the Web3 sector might be falling. A diversified crypto portfolio actually smoothed returns and typically lowered the overall portfolio's beta and correlation. Liquidity came and went with shifts in interest and demand, but performance was heterogeneous. This was very exciting. The massive influx of capital into crypto hedge funds in 2020 and 2021 made sense because the investable universe was expanding, and returns were differentiated.
Fast forward to today, and the returns of all "crypto-wrapped" assets look identical. Since the flash crash on October 10th, the declines across sectors have been almost indistinguishable. Whether you hold this or that, or how the token captures economic value, or what the project's trajectory is... the returns are largely the same. This is incredibly frustrating.
Caption: Arca internal calculations and CoinGecko API data for a representative sample of crypto assets
During market booms, this table looks slightly more encouraging. "Good" tokens tend to outperform "bad" tokens. But a healthy system should actually be the opposite: you want good tokens to perform better during bad times, not just during good times. Here is the same table from the April 7th low to the September 15th high.
Caption: Arca internal calculations and CoinGecko API data for a representative sample of crypto assets
Interestingly, when the crypto industry was in its infancy, market participants worked very hard to differentiate between different types of crypto assets. For example, I wrote an article in 2018 where I categorized crypto assets into 4 types:
- Cryptocurrencies/money
- Decentralized protocols/platforms
- Asset-backed tokens
- Pass-through securities
At the time, this categorization was quite unique and attracted many investors. Importantly, crypto assets were evolving, from just Bitcoin, to smart contract protocols, asset-backed stablecoins, to equity-like pass-through securities. Researching different growth areas was a major source of alpha, and investors wanted to understand the various valuation techniques required to assess different asset types. Back then, most crypto investors didn't even know when unemployment data was released or when the FOMC met, and rarely looked to macro data for signals.
After the 2022 crash, these different asset types still exist. Nothing has fundamentally changed. But there has been a massive shift in how the industry markets itself. The "gatekeepers" decided Bitcoin and stablecoins were the only things that mattered; the media decided they didn't want to write about anything except TRUMP tokens and other memecoins. Over the past few years, not only has Bitcoin outperformed most other crypto assets, but many investors have even forgotten these other asset types (and sectors) exist. The underlying business models of companies and protocols haven't become more correlated, but the assets themselves have become more correlated due to investor flight and market makers dominating price action.
This is why Matt Levine's recent article about tokens was so surprising and well-received. In just four short paragraphs, Levine accurately described the differences and nuances between various tokens. It gives me some hope that this kind of analysis is still possible.
Leading crypto exchanges, asset managers, market makers, OTC desks, and pricing services still refer to everything besides Bitcoin as "altcoins" and seem to only write macro research, bundling all "cryptocurrencies" together as one giant asset. You know, take Coinbase for example, they seem to have only a very small research team led by a single primary analyst (David Duong), whose focus is primarily on macro research. I have nothing against Mr. Bitcoin (Mr. Duong) – his analysis is excellent. But who goes to Coinbase specifically for macro analysis?
Imagine if leading ETF providers and exchanges only wrote generically about ETFs, saying things like "ETFs down today!" or "ETFs react negatively to inflation data." They'd be laughed out of business. Not all ETFs are the same just because they use the same "wrapper," and those selling and promoting ETFs understand this. What's inside the ETF matters most, and investors seem to be able to intelligently differentiate between ETFs, largely because industry leaders have helped their clients understand this.
Similarly, a token is just a "wrapper." As Matt Levine eloquently described, what's inside the token matters. The type of token matters, the sector matters, its properties (inflationary or amortizing) matter.
Perhaps Levine isn't the only one who understands this. But he's doing a better job of explaining the industry than those who actually profit from it.
