From "flood irrigation" to a differentiated landscape, will the altcoin season repeat the glory of 2021?

Author: Jiawei @IOSG

Introduction

 

▲ Source: CMC

Over the past two years, the market's focus has always been drawn to one question: Will altcoin season return?

Compared to the strength of bitcoin and the advancement of institutionalization, the performance of most altcoins has been lackluster. The market cap of most existing altcoins has shrunk by 95% compared to the last cycle, and even new coins with much hype have become mired. Ethereum also experienced a prolonged period of negative sentiment, only recently recovering due to trading structures like the “coin-stock model.”

Even as bitcoin repeatedly hits new highs and ethereum catches up and stabilizes, overall market sentiment towards altcoins remains subdued. Every market participant is hoping for a repeat of the epic bull run of 2021.

I propose a core assertion: The kind of “flood-like” and months-long broad rally seen in 2021 is no longer possible due to changes in macro environment and market structure. This does not mean altcoin season will never come, but it is more likely to unfold in a slow bull market with greater differentiation.

The Fleeting 2021

 

▲ Source: rwa.xyz

The external market environment in 2021 was truly unique. Amid the COVID-19 pandemic, central banks around the world were printing money at unprecedented speeds and injecting this cheap capital into the financial system. Yields on traditional assets were suppressed, and suddenly everyone had a lot of cash on hand.

Driven by the search for high returns, capital began to flow massively into risk assets, with the crypto market becoming a major destination. Most notably, the issuance of stablecoins surged dramatically, skyrocketing from about $20 billion at the end of 2020 to over $150 billion by the end of 2021—a more than sevenfold increase within the year.

Within the crypto industry, after DeFi Summer, on-chain financial infrastructure was being laid out, NFT and metaverse concepts entered the mainstream, and both public chains and scaling solutions were in a growth phase. At the same time, the supply of projects and tokens was relatively limited, with high concentration of attention.

Take DeFi as an example: at that time, there were only a few blue-chip projects—Uniswap, Aave, Compound, Maker, etc.—that could represent the entire sector. Investors had fewer choices, making it easier for capital to unite and drive up the whole sector.

These two factors provided fertile ground for the 2021 altcoin season.

Why “Good Times Don’t Last, Grand Feasts Are Hard to Repeat”

Leaving aside macro factors, I believe the current market structure has changed significantly compared to four years ago in the following ways:

Rapid Expansion on the Token Supply Side

▲ Source: CMC

The wealth effect of 2021 attracted a large influx of capital. Over the past four years, the boom in venture capital has invisibly pushed up the average valuation of projects. The prevalence of airdrop economics and the viral spread of memecoins have together led to a sharp acceleration in token issuance, with valuations rising accordingly.

▲ Source: Tokenomist

Unlike 2021, when most projects were in a high-circulation state, the current market sees mainstream projects (except memecoins) generally facing huge token unlock pressures. According to TokenUnlocks, more than $200 billion worth of tokens are set to unlock in 2024-2025 alone. This is the much-criticized “high FDV, low circulation” industry status quo of this cycle.

Fragmentation of Attention and Liquidity

▲ Source: Kaito

In terms of attention, the chart above randomly samples the mindshare of Pre-TGE projects on Kaito. Among the top 20 projects, we can identify at least 10 different sub-sectors. If we were to summarize the main narratives of the 2021 market in a few words, most people would say “DeFi, NFT, GameFi/Metaverse.” But in recent years, it’s hard to immediately describe the market with just a few words.

In this situation, capital switches rapidly between different sectors, but only for short periods. Crypto Twitter is flooded with overwhelming information, and different groups spend most of their time discussing different topics. This fragmentation of attention makes it difficult for capital to unite as it did in 2021. Even if a sector performs well, it’s hard for the momentum to spread to other areas, let alone drive a broad market rally.

On the liquidity side, a fundamental of altcoin season is the spillover effect of profitable capital: liquidity first flows into mainstream assets like bitcoin and ethereum, then seeks higher potential returns in altcoins. This spillover and rotation effect provides sustained buying support for long-tail assets.

This seemingly natural situation is something we haven’t seen in this cycle:

• First, the institutions and ETFs driving up bitcoin and ethereum are unlikely to deploy capital further into altcoins. These funds prefer custodial and compliant blue-chip assets and related products, which marginally strengthens the siphoning effect toward top assets, rather than raising the water level evenly across the board.

• Second, most retail investors in the market may not even hold bitcoin or ethereum at all, but have been deeply trapped in altcoins over the past two years, leaving them with no spare liquidity.

Lack of Breakout Applications

The market frenzy in 2021 was actually supported by certain fundamentals. DeFi brought new life to blockchain’s long-standing application drought; NFTs spread creator and celebrity effects outside the crypto circle, with growth coming from new users and new use cases (at least that was the story).

After four years of technological and product iteration, we find that infrastructure is overbuilt, but truly breakout applications are few and far between. Meanwhile, the market is maturing, becoming more pragmatic and clear-headed—amid narrative fatigue, the market needs to see real user growth and sustainable business models.

Without a continuous influx of new blood to absorb the ever-expanding token supply, the market can only fall into a zero-sum game of internal competition, which cannot fundamentally provide the foundation needed for a broad rally.

Outlining and Envisioning This Cycle’s Altcoin Season

Altcoin season will come, but it won’t be like the one in 2021.

First, the basic logic of profit rotation and sector rotation still exists. We can observe that after bitcoin reaches $100,000, its short-term upward momentum will clearly weaken, and capital will start looking for the next target. The same applies to ethereum.

Second, in a market with long-term insufficient liquidity, altcoins held by investors are stuck, and capital needs to find ways to save itself. Ethereum is a good example: has ethereum’s fundamentals changed this cycle? The hottest applications, Hyperliquid and pump.fun, did not happen on ethereum; the “world computer” concept is also from long ago.

With insufficient internal liquidity, the only option is to look outward. Driven by DAT, and with ETH tripling in price, many stories about stablecoins and RWA finally have a realistic foundation.

I envision the following scenarios:

Deterministic Rallies Driven by Fundamentals

▲ Source: TokenTerminal

In an uncertain market, capital instinctively seeks certainty.

Funds will flow more into projects with strong fundamentals and PMF. These assets may have limited upside, but are relatively more resilient and certain. For example, DeFi blue chips like Uniswap and Aave have maintained good resilience even during market downturns; Ethena, Hyperliquid, and Pendle have emerged as new stars this cycle.

Potential catalysts could include actions at the governance level, such as turning on fee switches.

The commonality among these projects is that they generate considerable cash flow and their products have been fully validated by the market.

Beta Opportunities in Strong Assets

When a market leader (such as ETH) starts to rally, capital that missed the move or seeks higher leverage will look for “proxy assets” highly correlated with it to gain beta returns. Examples include UNI, ETHFI, ENS, etc. These can amplify ETH’s volatility, but their sustainability is relatively weaker.

Repricing of Old Sectors Under Mainstream Adoption

From institutional bitcoin buying, ETFs, to the DAT model, the main narrative of this cycle is traditional finance adoption. If stablecoin growth accelerates—say, quadrupling to $1 trillion—much of this capital will likely flow into DeFi, driving a repricing of its value. As crypto financial products move into the traditional finance spotlight, this will reshape the valuation framework for DeFi blue chips.

Localized Ecosystem Speculation

▲ Source: DeFiLlama

Due to its consistently high discussion heat, user stickiness, and inflow of incremental capital, HyperEVM may see weeks to months of wealth effect and alpha during the growth cycle of ecosystem projects.

Valuation Divergence Among Star Projects

▲ Source: Blockworks

Take pump.fun as an example: after the emotional peak of token issuance fades and valuations return to conservative ranges with market divergence, if the fundamentals remain strong, there may be a rebound opportunity. In the medium term, as the leader of the meme sector with both revenue as fundamental support and a buyback model, pump.fun may outperform most top memes.

Conclusion

The kind of “blind-buy” altcoin season of 2021 is now history. The market environment is becoming more mature and differentiated—markets are always right, and as investors, we can only keep adapting to these changes.

Based on the above, I also offer a few predictions as a conclusion:

1. After traditional financial institutions enter the crypto world, their capital allocation logic is completely different from that of retail investors—they require explainable cash flows and comparable valuation models. This allocation logic directly benefits DeFi’s expansion and growth in the next cycle. To compete for institutional capital, DeFi protocols will become more proactive in launching fee distribution, buybacks, or dividend designs over the next 6–12 months.

   In the future, valuation logic based solely on TVL will shift toward cash flow distribution logic. We can see some recently launched institutional-grade DeFi products, such as Aave’s Horizon, which allows tokenized US Treasuries and institutional funds to be used as collateral for stablecoin lending.

   As the macro interest rate environment becomes more complex and traditional finance’s demand for on-chain yields increases, yield infrastructure that can be standardized and productized will become highly sought after: interest rate derivatives (such as Pendle), structured product platforms (such as Ethena), and yield aggregators will benefit.

   The risk DeFi protocols face is that traditional institutions may use their brand, compliance, and distribution advantages to issue their own regulated “walled garden” products, competing with existing DeFi. This can be seen from the joint launch of the Tempo blockchain by Paradigm and Stripe.

2. The future altcoin market may tend toward a “barbell” structure, with liquidity flowing to two extremes: on one end, blue-chip DeFi and infrastructure projects. These have cash flow, network effects, and institutional recognition, and will absorb most capital seeking steady appreciation. On the other end are purely high-risk chips—memecoins and short-term narratives. These assets are not supported by any fundamental narrative, but serve as highly liquid, low-barrier speculative tools to meet the market’s appetite for extreme risk and return. Projects in the middle—with some product but insufficient moat and bland narrative—may find their market position awkward if liquidity structure does not improve.