Alpha First:

• Disgusting behavior by the @BanklessVC is a clear indicator we've entered an extractive, PvP, phase of the market. Protect yourself and your gains.
• I doubt we've topped for the cycle, this is a natural correction as the crypto market looks to extract pain - but the pain can last for a while.
• Coins like virtuals, ai16z, & heyanon may set new ATHs in the recovery but are subject to narrative risk - continue to reevaluate your worldview.

What Makes the Market go Up?

The market goes up when new money enters the market, duh. From now on, I’m going to refer to the concept of new money entering the market in relation to the "wealth effect." What we should all want is for crypto to create real value (wealth) in the world and to share in that monetary expansion. There are a few ways this can happen:

1. Wealth is created through innovation (airdrops)

Airdrops have emerged as a powerful mechanism for value redistribution in crypto markets, creating significant wealth effects that benefit broad participant bases. The Uniswap airdrop in September 2020 set the standard, distributing 400 UNI tokens (worth approximately $1,400 at launch) to over 250,000 addresses, ultimately reaching a total value of over $900 millionThe Jito airdrop was an early catalyst of the Solana memecoin bull runThe Jito airdrop in December 2023 distributed 90 million JTO tokens worth $165 million at launch, with some users receiving up to $10,000 in value from moving just $40 of JitoSOL. The Jito airdrop helped drive Solana's total value locked (TVL) higher and contributed to increased on-chain activity. This wealth effect stimulated broader Solana ecosystem adoption and development, similar to how Uniswap's UNI token catalyzed DeFi growth.

Jupiter's approach to token distribution further exemplifies the democratizing potential of airdrops. Their planned distribution of 700 million JUP tokens targets over 2.3 million eligible wallets, making it one of the most broadly distributed airdrops in crypto history. Jupiter's airdrop strategy aims to grow their ecosystem by incentivizing long-term participation and governance involvement. These airdrops have demonstrated remarkable efficiency in expanding market participation.This is what I'm talking aboutThe wealth effect extends beyond immediate financial gains. These airdrops have transformed users into stakeholders, enabling them to participate in governance and protocol development. This has created a virtuous cycle where enriched participants reinvest in the ecosystem, funding further market expansion and innovation.These strategic distributions have proven to be powerful market catalysts, triggering broader bull market cycles in their respective sectors. The Uniswap airdrop sparked the DeFi Summer of 2020, with its distribution igniting a wave of innovation across decentralized finance. Similarly, Jito's December 2023 airdrop marked a turning point for Solana's ecosystem, driving TVL and catalyzing unprecedented on-chain activity. This surge in liquidity and market confidence laid the foundation for the subsequent memecoin explosion, which saw a remarkable growth. These airdrops effectively functioned as ecosystem-wide stimulus packages, creating self-reinforcing cycles of investment and innovation that defined their respective market eras.

2. Wealth is compounded (marginal buyers)

When markets experience positive catalysts like strategic airdrops, they attract previously sidelined participants who bring fresh capital and enthusiasm. The influx of these marginal buyers creates a virtuous cycle of market expansion and innovation. Airdrops spark a mostly positive FOMO driving new and existing users deeper into the marketSidelined investors watching successful airdrops and subsequent market momentum begin deploying their capital, transforming from spectators to active participants. This transition from cash to crypto assets represents genuine new money entering the ecosystem rather than just transfers between existing participants.Major financial institutions are increasingly facilitating this transition, with firms like BlackRock, Fidelity, and Franklin Templeton creating products that bridge traditional finance with digital assets. Their involvement helps legitimize the market and provides easier access points for sidelined capital to enter. This expansion creates a positive-sum environment where new entrants contribute to overall market growth.Unlike zero-sum trading environments, markets energized by new participants create genuine wealth effects through expanded liquidity, increased development activity, and broader adoption. This positive feedback loop attracts additional sidelined capital, further fueling ecosystem growth.

3. Wealth is created through leverage (multiple expansion)

In the terminal phase of a bullish period, leverage becomes the primary driver of price appreciation, marking the transition from value creation to value multiplication. As the market enters price discovery, traders increasingly employ leverage to amplify their positions, creating a self-reinforcing cycle of upward momentum.interestingWhen Bitcoin enters its price discovery phase above historical highs, leverage ratios expand dramatically as traders seek to maximize their exposure. This creates a cascade effect where borrowed stablecoins fuel further buying, driving prices higher and encouraging even more leveraged positions. This multiplier effect accelerates price movements.The increasing use of leverage also introduces systemic fragility into the market. As more traders take leveraged positions, the potential for cascading liquidations grows, particularly when borrowed stablecoins become more expensive and harder to access.Rising stablecoin borrowing costs serve as a key indicator that the market is entering its final phase. This represents a crucial shift from organic growth to leverage-driven expansion, where no new value is being created - merely existing value being multiplied through debt.The heavy reliance on leverage in this phase creates a precarious situation where sudden price movements can trigger mass liquidations, leading to rapid price corrections. This vulnerability signals that the bull market is approaching its conclusion, as the system becomes increasingly dependent on borrowed money rather than fundamental value creation.

What Make the Market go Down?

The market goes up when money leaves the market, duh. This is essentially the reverse wealth effect where grifters take advantage of the market's animal spirits, smart money takes their chips off the table to lock in profits, and fools get liquidated.

1. Wealth is extracted from the market ⭐️ You are here

The crypto ecosystem regularly witnesses cycles of value extraction where sophisticated operators design schemes to drain capital from enthusiastic market participants. Unlike productive innovations that distribute value, these schemes systematically remove liquidity from markets through various predatory mechanisms.The most nauseating price of the Bankless story is that it only cost them 2 SOL to drain thousands of SOL from the ecosystemThe recent Aiccelerate DAO launch demonstrates this evolution - despite backing from prominent advisors like Bankless founders and industry veterans, the project faced immediate criticism when insiders who received tokens began selling without vesting periods. Even established names can be vehicles for rapid value extraction.Celebrity tokens also exemplified this predatory behavior. These projects killed the memecoin cycle by effectively transferring wealth from retail buyers to insiders through malicious smart contracts and coordinated dumps. These extraction events damage market confidence and deter legitimate participants. Rather than building sustainable ecosystems, they create cycles of distrust that harm the broader cryptocurrency ecosystem's maturation.I talked about this a while back in the messari newsletter, subscribe plzInstead of reinvesting profits into ecosystem development, these schemes systematically drain liquidity from the market. The funds extracted typically exit the crypto ecosystem entirely, reducing the total available capital for legitimate projects and innovation.The evolution from obvious scams to sophisticated operations backed by respected names represents a concerning trend. When established institutions participate in rapid value extraction, it becomes increasingly difficult for market participants to distinguish legitimate projects from sophisticated grifts.

2. Only sellers

Does it surprise you that BAYC topped just 3 months later?When markets begin their descent, a critical asymmetry emerges between sophisticated players who recognize the shift and retail participants who remain anchored to bullish narratives. This phase is characterized not by the entry of new capital, but by the methodical extraction of liquidity by experienced operators.Professional traders and investment firms begin reducing exposure while maintaining public optimism. Venture capital firms quietly liquidate positions through OTC markets and strategic exits, preserving capital while avoiding market impact. This creates a facade of stability even as significant capital leaves the system.Smart money begins withdrawing liquidity from DeFi protocols and trading venues. This subtle but steady drainage of liquidity creates increasingly fragile market conditions, though the impact isn't immediately visible to casual observers.Looks like some smart money is taking chips off the tablePsychology of Denial: While sophisticated players secure profits, retail investors often remain convinced that dips are temporary buying opportunities. This cognitive dissonance is reinforced by:

• Social media echo chambers maintaining bullish narratives
• Attachment to unrealized gains from the bull market
• Misinterpretation of "diamond hands" mentality

Most retail participants miss optimal exit points, holding through initial declines while rationalizing their decisions. By the time the downtrend becomes obvious, significant value has already been lost, and selling pressure intensifies as panic sets in.The steady withdrawal of professional capital creates deteriorating market conditions where each subsequent sell order has an increasingly pronounced price impact. This deterioration in market depth often goes unnoticed until large price moves reveal the underlying fragility.Unlike the positive-sum environment of a bull market with new entrants, this phase represents pure value destruction as capital systematically exits the crypto ecosystem, leaving remaining participants to absorb mounting losses.

3. Leverage blows up (liquidation cascades)

The final stage of market capitulation reveals the devastating impact of excessive leverage, perfectly captured in Warren Buffett's famous axiom: "Only when the tide goes out do you discover who's been swimming naked." The crypto market's most spectacular collapses exemplify this principle with stark clarity.The unraveling began when 3AC's $10 billion hedge fund imploded in June 2022. Their leveraged positions, including $200 million in LUNA and significant exposure to Grayscale Bitcoin Trust, triggered a cascade of forced liquidations. The fund's failure exposed an intricate web of interconnected loans, with over 20 institutions affected by their defaults.The FTX collapse further illustrated the dangers of hidden leverage. Alameda Research had borrowed $10 billion of FTX customer funds, creating an unsustainable leverage structure that ultimately led to both entities' downfall. The revelation that 40% of Alameda's $14.6 billion in assets were held in the illiquid FTT token exposed the fragility of their leveraged positions.Old research by the goat @Saypien_These implosions triggered widespread market contagion. The collapse of 3AC led to the bankruptcy of multiple crypto lenders, including BlockFi, Voyager, and Celsius. Similarly, FTX's fall created a domino effect across the industry, with numerous platforms freezing withdrawals and eventually filing for bankruptcy.The cascading liquidations revealed the true nature of market depth. As leveraged positions were forcibly unwound, asset prices plummeted, triggering further liquidations in a vicious cycle. This exposed how much of the market's apparent stability had been supported by leverage rather than genuine liquidity.The tide going out revealed that many supposedly sophisticated institutions were swimming naked, with inadequate risk management and excessive leverage. The interconnected nature of these positions meant that one failure could trigger a system-wide crisis, exposing the fragility of the entire crypto ecosystem.

Looking Forward - Narrative Risk

The header for this article was a little provactive. My intuition tells me this a healthy, if not painful, market flush. We will rally. My price targets, for Bitcoin especially, remain pretty high - but I've taken my chips off the table and secured bitcoin denominated gains I'm happy to carry into next cycle if it's really over. Remember that nobody ever went broke by taking profits.I've written ad nauseam (article 1, article 2 & article 3) about the importance of following the narrative and not getting stuck in old coins. The longer this market downturn extends, the more the narrative is going to shift. If the market fully recovers tomorrow morning, I'd expect virtuals, ai16z, & virtuals to continue winning. But if it more time for the market to recover, then you should be on the look out for newly ordained coins to win the attention of new flows.You should interpret as me telling you not to have bag bias and hold your coins all the way through these doldrums (unless you really have that conviction). Even if they set new ATHs I'm willing to bet you're going to lose a lot of potential gains to the opportunity cost of not rotating into new coins.