The crypto market five years ago was actually healthier than it is now.

Original Title: The Crypto Market was Much Healthier 5 Years Ago

Original Author: Jeff Dorman (Arca CIO)

Original Compilation: DeepSea TechFlow

Introduction:

Is the crypto market becoming increasingly dull? Arca Chief Investment Officer Jeff Dorman points out that despite infrastructure and regulatory environments never being stronger, the current investment climate is “the worst in history.”

He sharply criticizes industry leaders’ failed attempts to force cryptocurrencies into “macro trading tools,” leading to extreme asset correlation. Dorman calls for a return to the essence of “tokens as securities wrappers,” focusing on cash-flow-generating quasi-equity assets like DePIN, DeFi, and similar.

In a time when gold is soaring while Bitcoin remains relatively weak, this in-depth reflection offers an important perspective for re-examining Web3 investment logic.

Full Text:

Bitcoin is Facing an Unfortunate Situation

Most investment debates exist because people operate on different time horizons, often resulting in “talking past each other,” even though technically both sides are correct. Take the debate between gold and Bitcoin: Bitcoin enthusiasts tend to say Bitcoin is the best investment because its performance over the past 10 years has far outpaced gold.

Figure caption: Source TradingView, comparison of returns over the past 10 years for Bitcoin (BTC) and gold (GLD)

Gold investors, on the other hand, tend to believe gold is the best investment and have recently been mockingly criticizing Bitcoin’s downturn, as gold has significantly outperformed Bitcoin over the past year (similar situations apply to silver and copper).

Figure caption: Source TradingView, comparison of returns over the past 1 year for Bitcoin (BTC) and gold (GLD)

Meanwhile, over the past 5 years, gold and Bitcoin returns have been nearly identical. Gold often remains stagnant for long periods, then skyrockets when central banks and trend followers buy in; Bitcoin tends to have sharp rises followed by major crashes, but ultimately moves higher.

Figure caption: Source TradingView, comparison of returns over the past 5 years for Bitcoin (BTC) and gold (GLD)

Therefore, depending on your investment horizon, you can almost win or lose any argument about Bitcoin versus gold.

That said, it’s undeniable that recently gold (and silver) have outperformed Bitcoin. To some extent, this is a bit amusing (or sad). The biggest companies in the crypto industry have spent the past 10 years catering to macro investors rather than fundamental investors, only for these macro investors to say, “Forget it, we’ll just buy gold, silver, and copper.” We have long been calling for a shift in industry thinking. Currently, there are over @600 trillion@ dollars in entrusted assets, and the buyers of these assets are much more sticky investors. Many digital assets look more like bonds and stocks, issued by companies that generate income and buy back tokens, yet market leaders for some reason ignore this token sub-sector.

Perhaps Bitcoin’s recent poor performance relative to precious metals is enough to make large brokerages, exchanges, asset managers, and other crypto leaders realize that their attempt to turn cryptocurrencies into all-encompassing macro trading tools has failed. Instead, they might focus on and educate the investors managing the $600 trillion, who prefer to buy income-generating assets. It’s not too late for the industry to start focusing on quasi-equity tokens that underpin cash-flowing tech businesses like DePIN, CeFi, DeFi, and token issuance platforms.

But on the other hand, if you just change the “finish line,” Bitcoin remains king. So, the more likely scenario is that nothing will change.

Asset Differentiation

The “good days” of crypto investing seem to be a thing of the past. Looking back at 2020 and 2021, it seemed every month brought new narratives, sectors, use cases, and new tokens, with positive returns across all corners of the market. While the growth engine of blockchain has never been stronger (thanks to legislative progress in Washington, the growth of stablecoins, DeFi, and RWA tokenization of real-world assets), the investment environment has never been worse.

A sign of market health is dispersion and lower cross-market correlation. You’d want healthcare and defense stocks to behave differently from tech and AI stocks; you’d also 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 a “broad rally,” but that’s not entirely accurate. It was rare for the entire market to move in unison. More often, when one sector rose, another fell. For example, gaming stocks surged while DeFi declined; when DeFi surged, “dinosaur-level” Layer-1 (Dino-L1) tokens fell; when Layer-1 sectors soared, Web3 sectors declined. A diversified crypto portfolio actually smooths out returns and often reduces overall portfolio beta and correlation. Liquidity ebbs and flows with interest and demand, but performance varies widely. This is very encouraging. The influx of capital into crypto hedge funds in 2020 and 2021 made sense because the investable universe was expanding, and returns were diverse.

Fast forward to today, all “wrapped” crypto assets seem to produce similar returns. Since the flash crash on October 10, the declines across sectors are nearly indistinguishable. Whatever you hold, or how that token captures economic value, or the project’s development trajectory… returns are generally the same. This is very frustrating.

Figure caption: Internal Arca calculations and representative crypto asset sample data from CoinGecko API

During market booms, this chart might look a bit more encouraging. “Good” tokens tend to outperform “bad” tokens. But a healthy system should be the opposite: you want good tokens to perform better even in bad times, not just during bull markets. Here’s the same chart from the April 7 low to the September 15 high.

Figure caption: Internal Arca calculations and representative crypto asset sample data from CoinGecko API

Interestingly, when the crypto industry was still in its infancy, market participants worked hard to differentiate various types of crypto assets. For example, I published an article in 2018 where I categorized crypto assets into four types:

2. Cryptocurrencies/Money
3. Decentralized protocols/platforms
4. Asset-backed tokens
5. Pass-through securities

At the time, this classification was quite unique and attracted many investors. Importantly, crypto assets are evolving—from just Bitcoin, to smart contract protocols, asset-backed stablecoins, and then to quasi-equity pass-through securities. Researching different growth sectors was once a primary source of alpha, as investors sought to understand valuation techniques for different asset types. Back then, most crypto investors didn’t even know when unemployment benefit data was released or when the FOMC meetings occurred, and rarely looked for signals from macro data.

After the 2022 crash, these different asset types still exist. Essentially, nothing has changed. But the marketing of the industry has shifted dramatically. The “gatekeepers” now insist that Bitcoin and stablecoins are the only important assets; the media only wants to write about TRUMP tokens and other memecoins. Over the past few years, Bitcoin’s performance has outstripped most other crypto assets, and many investors have even forgotten about the existence of these other asset types (and sectors). The business models of underlying companies and protocols haven’t become more relevant, but because investors are fleeing and market makers dominate price movements, the assets themselves have become more correlated.

That’s why Matt Levine’s recent article on tokens was so surprising and popular. In just four short paragraphs, Levine accurately described the differences and nuances among various tokens. It gave me hope that such analysis is still feasible.

Leading crypto exchanges, asset managers, market makers, OTC platforms, and pricing services still call everything other than Bitcoin “altcoins,” and seem to only produce macro research reports, bundling all “cryptocurrencies” into one large asset class. You know, Coinbase, for example, appears to have only a small research team led by a main analyst (David Duong), whose focus is mainly on macro research. I have no criticism of Mr. Duong—his analysis is excellent. But who would specifically go to Coinbase just for macro analysis?

Imagine if top ETF providers and exchanges only casually wrote articles about ETFs, saying things like “ETF down today!” or “ETF reacts negatively to inflation data.” They would be laughed out of business. Not all ETFs are the same; just because they use the same “wrapper,” the people selling and promoting ETFs understand this. What’s inside the ETF is what matters most, and investors seem capable of distinguishing different ETFs wisely, mainly because industry leaders help their clients understand these differences.

Similarly, tokens are just a “wrapper.” As Matt Levine eloquently describes, what’s inside the token is what matters. The type of token, the sector, its attributes (inflation or amortization) are all important.

Perhaps Levine isn’t the only one who understands this. But he does a better job explaining the industry than those who actually profit from it.

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