Crypto market enters aggressive PvP extraction phase

The crypto market may yet reach local tops, but Messari analysts have noticed a risky stage, where some traders will lose. After a rally that lifted all boats, the value extraction will become a risky PvP game, inviting more caution from traders. 

The crypto market may be past the exponential growth stage that trickled through different assets. According to Messari analysts, the market may offer more local tops, but it will be a battle between traders as earnings become a PvP competition. 

At this stage, the market can produce more rallies, but some holders may start extracting value while undermining competitive portfolios. Professional investors can achieve value extraction while retail is still optimistic. 

The market’s stage of value inflows has ended

After two years of a stagnant bear market running on pure speculation and the occasional pump, 2024 was a year of wealth creation through innovation. The year was a period of expanding liquidity and the emergence of new assets. The past 12 months arrived with a mix of record stablecoin supply and several high-profile airdrops. 

According to Messari’s analysis, the Jupiter DEX Jupuary event was one of the drivers for growth on Solana. The airdrop invited a new community of stakeholders, who also promoted multiple activities on the Solana chain. 

Entire crypto ecosystems received a boost, creating new sources of growth, while onboarding new users. The launch of successful airdrop tokens also invited additional stablecoin liquidity. In the case of Solana, the chain increased its USDC supply. 

The inflow of new stakeholders and buyers leads to more innovation and expansion, a period where early buyers are always eager to hold and wait for a breakout. After the 2022-2023 stagnation, the launch of major airdrop farming projects encouraged users to return to the crypto market, bringing in new retail funds and everyday on-chain activity. 

The inflow of users also accelerated the involvement of large funds and institutions. BlackRock, Fidelity, and Franklin Templeton expanded the new standard of tokenized securities, which became a new source of collaterals and liquidity in crypto. 

Markets have moved on to the leveraged price discovery stage

After the initial growth of new projects, traders moved in as Bitcoin (BTC), Ethereum (ETH), and other assets reached peak open interest. Those leveraged positions defined market direction and caused a series of speculative price moves. 

At that stage, the 200B supply of stablecoins, combined with DeFi lending, allowed traders to take more aggressive positions to make the most of price discovery. 

During the leveraged stage, there is no way to pinpoint the moment when borrowed liquidity is overheating the market. In crypto, the effect may be magnified by bot-driven trades or wash trading. 

According to Messari, leveraged tops may be the sign that the market is preparing for unwinding. Higher prices allow some of the smart money to lock in their gains. Messari also noted that at this stage of the market, projects may emerge to tap the overall enthusiasm and primarily extract value.

One such project was the Aiccelerate DAO (AICC), which was hyped up to new investors only for early investors and insiders to sell to the community. 

This trend had developed with meme tokens earlier, but users quickly noted the formation of cabals. The effect was an extraction of liquidity, which did not return to the market. Some of the earlier VC-backed projects did the same, as early investors sold their holdings after achieving outsized gains.

Retail may remain bullish during the value extraction phase

For both BTC and token-based projects, retail investors can remain irrationally bullish, even as VC investors and funds take profits. 

For memecoin investors, this may be the time to seek out community coins with strong holding ethos. For DeFi and other protocols, whales and experienced investors may be preparing for a quiet withdrawal, to avoid causing panic. Other projects rely on fees for value extraction, as in the case of Pump.fun.

This time around, Messari notes a shifting trend among investors. In the past, token and coin buyers would wait for years to achieve a breakout. In 2024, narratives shifted much faster to new classes of coins and tokens. 

Narrative breakdowns take weeks from the emergence of a trend to tokens losing 50% of their value. The recent rally of AI agent tokens is already in decline. Instead of holding, the new cohorts of crypto investors prefer to snipe potential trends early, as some tokens never return once their value is extracted.

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