Why the decentralized nature of crypto defines the current market

Author: Alex Botte, CFA, CAIA, CoinDesk, partner at crypto-native venture capital firm Hack VC; Compiled by: Wu Baht, Golden Finance

One of the most interesting features of the current cryptocurrency market is decentralization or higher returns in different parts of the market.

In today’s highly liquid markets, industries focused on infrastructure and technology significantly outperform gaming , Metaverse and entertainment-related tokens and other more consumer-oriented categories.

The 'Range' value shows the difference between the maximum and minimum cumulative returns at each time point, highlighting the degree of dispersion. Dispersion started at a high level in the fourth quarter of 2021 due to a surge in culture and entertainment-related developments. Dispersion then declined in 2022 as markets collapsed, correlations rose, and assets traded largely in tandem.

However, dispersion has been rising since 2023, picking up significantly in the fourth quarter of last year, with currencies and smart contract platforms (infrastructure) disconnected from the rest of the market. In 2024, dispersion is at a high level during this period, tokens in the cultural and entertainment fields continue to fall, and BTC, ETH and other smart contract platforms The token performed well.

Give a few examples to illustrate the last point. The current maximum decline for the entire market (using the CoinDesk Market Index) during this period is -33%. By comparison, some of the largest consumer tokens in gaming and cultural entertainment include Axie Infinity (games), Decentraland and The Sandbox (metaverse), and Apecoin (a token associated with the NFT series Bored Ape Yacht Club). The maximum drops for these coins were -96%, -94%, -96%, and -96% respectively. They have not participated in this market recovery.

Another way to look at dispersion is through the rolling 30-day average of the daily standard deviation of the CoinDesk Sector Index returns. Industry dispersion has been mostly above average since the fourth quarter of last year. This higher dispersion suggests that markets are no longer moving in sync, with individual industries experiencing different growth trajectories based on their fundamentals and investor interest.

To dig deeper, we looked at the number of billion-dollar tokens in each industry (industry defined by Hack VC) five years ago compared to today. In 2019, currencies dominated the market: BTC and BTC competitors. Today, half of all tokens are in the infrastructure space (layer 1 and layer 2 blockchains). The industry has experienced tremendous growth over the past five-plus years. We are also seeing new industries emerging. For example, artificial intelligence is a relatively new segment of the market that merges two of the most exciting emerging technologies: crypto and artificial intelligence. While there's a lot of hype and promise, real benefits do exist today. Over the next five years, we expect more industries and sub-sectors to emerge.

With time Over time, the fragmentation and development of new industries can be advantageous to active managers. This shows that the market is maturing, value is being rewarded and fundamentals are becoming more important. Dispersion also provides significant opportunities for generating alpha. It makes it easier for active managers with alpha to beat the market, although it also increases the risk of underperformance without a strong strategy.

In this environment, investors must be more cautious and understand the industries and projects they invest in. Active management becomes critical as the market rewards those who can identify and exploit trends. These markets are also particularly beneficial to investors who have a deep understanding of technological advancements and the ability to discern long-term value from short-term hype.