Why is it so hard for crypto liquid funds to beat bitcoin this cycle?

This is a segment from the 0xResearch newsletter. To read full editions, subscribe. The following is part one of a multi-part series on the state of crypto liquid markets, based on several conversations with liquid funds. It’s an open secret that most crypto liquid funds are underperforming. Liquid funds work similarly to traditional hedge funds: Pick a market direction, deploy capital and outperform a benchmark. Unlike hedge funds, however, the yardstick to beat is not a composite benchmark like the S&P 500. Crypto liquid funds are in the game to beat bitcoin. For example, bitcoin appreciated ~110% in 2024. Any liquid fund performing below that benchmark is underperforming, or considered average at best. Unfortunately, the rise of orange coin means liquid funds have a much harder job. Bitcoin has generally held steady on a year-to-date basis while the rest of the altcoin market has plunged into oblivion. Consider bitcoin dominance (BTC.D), which has steadily climbed over the past year to 63% today against a total crypto market cap of $3.3 trillion. Contrast that to last cycle’s market cap peak in November 2021 when BTC.D hovered at the 40-45% range. VCs such as DBA’s Jon Charbonneau even question BTC as a benchmark. The appropriate benchmark may be a weighted-average basket of alts like ETH, SOL and BNB, Charbonneau said on the 0xResearch podcast. This likely explains the noticeably bearish vibes in the Crypto Twitter echo chamber despite bitcoin hovering close to its all time-highs. Many higher risk-seeking investors are positioned on the thesis that altcoins would surge harder than bitcoin, and therefore have been “sidelined” from BTC’s rally. Pantera’s Cosmo Jiang told me: “It’s not great right now. Most directional liquid funds are probably negative against BTC. For the market-neutral liquid funds, industry averages are irrelevant. Yet they too are having a bad year, but that means they’re generally flat on performance, not positive.” Practically every liquid fund I’ve spoken to agrees that bitcoin has situated itself as an institutional/macro asset, or as “digital gold.” “We’re at an interesting point in the S-curve of bitcoin’s adoption where you see penetration rising quickly because of ETFs and the US government’s strategic reserve. Bitcoin inflows exceeded Nasdaq’s QQQ inflows last year, which is crazy,” Jiang said. “Most players still don’t appreciate the nuance that BTC performance is vastly different from the rest of the crypto market.” It’s not just all about orange coin either, which is incidentally up 11% on the week. The faltering performance of most liquid funds is impacted by a dark, looming cloud hovering over the altcoin market. The glut of L1/L2, DeFi, DePIN, AI and memecoins that already exist and are soon to be unlocked spells a bleak outlook, Defiance Capital’s Arthur Cheong told me. “The unlock schedule for all alts, excluding ETH, is estimated to be $1 billion every month for the next two years. There simply isn’t that much demand for altcoins. The total capital by all crypto liquid funds comes up to ~$10-15 billion of capital,” Cheong said. These structural dynamics, too, affect liquid funds specialized in market-neutral strategies. “Even when projects try to sell their locked tokens over the counter (OTC) at 30-40% discounts, it’s hard to find a buyer. There’s a broad expectation by markets that altcoins will plunge,” Presto research analyst Min Jung said. $60 billion in buying pressure would be needed to sustain the prices of the top 10 largest tokens (STRK, ENA, JUP, ONDO, etc.) launched in 2024, Presto wrote last year. This mismatch in demand and supply means that liquid funds must work harder to pick the “right” winners. How are liquid funds are grappling onto fundamentals to adapt? What crypto sectors are liquid funds looking at? Is the four-year cycle dead? Is the L1 valuation premium dead?