Dispersion Is Defining the Current Crypto Market

One of the most interesting features of today’s cryptocurrency markets is the high level of dispersion, or range of returns, across different segments of the market.

In today’s liquid markets, sectors focused on infrastructure and technology have significantly outperformed more consumer-focused categories like gaming, metaverse, and entertainment-related 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 shows the difference between the maximum and minimum cumulative returns at each point in time, highlights the level of dispersion. The dispersion started high in the fourth quarter of 2021 due to the increase in cultural and entertainment developments. It then fell in 2022 as the market collapsed, correlations increased, and assets traded largely in sync.

However, the distribution has been rising since 2023 and has recovered significantly in the fourth quarter of last year, with Currencies and Smart Contract Platforms (infrastructure) separating from the rest of the market. In 2024, the distribution remains high during this period, with tokens in the Culture and Entertainment sector continuing to decline while BTC, ETH and other smart contract platform tokens outperform.

Let’s take a few examples to illustrate this last point. The current maximum decline of the overall market (using the CoinDesk Market Index) was -33% during this period. Compare this to some of the largest consumer tokens in the Gaming and Culture & Entertainment sectors, including Axie Infinity (gaming), Decentraland and The Sandbox (metaverses), and Apecoin (the token associated with the NFT collection Bored Ape Yacht Club). These tokens had maximum declines of -96%, -94%, -96%, and -96% respectively. They did not participate in the market recovery this cycle.

Another way to view dispersion is the 30-day rolling average of the daily standard deviation of returns across CoinDesk sector indexes. Since the fourth quarter of last year, sector dispersion has been mostly above average. This high level of dispersion suggests that the market is no longer moving in unison and that individual sectors are experiencing different growth trajectories based on their fundamentals and investor interest.

To dig deeper, we look at the number of tokens worth billions of dollars in each sector (sectors defined by Hack VC) compared to five years ago. In 2019, Currencies dominated the market: BTC and BTC rivals. Today, half of the tokens are in the infrastructure sector (layer 1 and layer 2 blockchains). This sector has seen tremendous growth over the last five-plus years. We are also seeing new sectors emerge. For example, AI is a relatively new part of the market that brings together two of the most exciting new technologies: crypto and AI. While there is a lot of hype and promise, there are real benefits today. We expect additional sectors and sub-sectors to emerge over the next five years.

The story continues

This dispersion and the development of new sectors over time are positive for active managers. It shows the growing complexity of the market, where value is rewarded and fundamentals are increasingly important. Dispersion also provides significant opportunities to generate alpha. It makes it easier for active managers with alpha to outperform the market, but it also increases the risk of underperformance without a strong strategy.

In this environment, investors must be more selective and knowledgeable about the sectors and projects they invest in. Active management becomes important as the market rewards those who can 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.

Explanation

The information herein is for general informational purposes only and does not constitute, and is not intended to constitute, investment advice and should not be relied upon in evaluating any investment decision. Such information should not be relied upon as accounting, legal, tax, business, investment or other related advice. You should consult your own advisors, including your own, for accounting, legal, tax, business, investment or other related advice, including anything discussed herein.

This article reflects the current views of the author(s) and is not made 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, general partner affiliates or others associated with Hack VC. Certain information contained herein has been obtained from published sources and/or prepared by third parties and, in certain cases, has not been updated to date. Although such sources are believed to be reliable, Hack VC, its affiliates, general partner affiliates or others associated with Hack VC make no representations as to their accuracy or completeness and should not be relied upon as such or as the basis for any accounting, legal, tax, business, investment or other decisions. The information contained herein does not purport to be complete and is subject to change, and Hack VC has no obligation to update such information or to provide notice if such information becomes inaccurate.

Past performance is not necessarily indicative of future results. Forward-looking statements made herein are based on certain assumptions and analyses made by the author in light of his or her own experience and perception of historical trends, current conditions and expected future developments, and other factors he or she believes are appropriate under the circumstances. Such statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict.