Is VC influence fueling poor performance in altcoins?

Venture capital’s growing influence in the cryptocurrency market has created a notable imbalance, contributing to the poor performance of many altcoins, according to New Form Capital’s Srinivas Dhulipala.

In a recent interview, Dhulipala pointed to a fundamental imbalance in how investments are structured in the cryptocurrency market.

Venture capital firms control a disproportionately large share of the market, while active fund managers—who typically help ensure liquidity—manage only a small portion of crypto assets.

Citing data from New Form, Dhulipala said that VC firms account for around 40% of the total assets in the crypto space, while active funds manage only 11%.

This imbalance has led to low liquidity and the underperformance of many smaller tokens.

Unlike traditional venture capital, where equity is involved, crypto VCs often receive tokens issued by projects, which they later sell into liquid markets.

However, those markets are relatively small and cannot absorb the excess supply without lowering prices, Dhulipala explained, adding:

When they exit, they exit into liquid markets, and because the liquid markets are smaller in proportion to the VC markets, they can’t absorb that supply without the tokens’ prices going down.

While Dhulipala attributes the poor performance of altcoins largely to the liquidity challenges posed by VC firms exiting their positions, previous insights from analyst Miles Deutscher add another dimension to why altcoins might be underperforming.

Deutscher noted that the influx of VC funding in 2021 and early 2022 drove the creation of numerous new projects, tripling the number of crypto tokens in circulation by 2022.

However, as market conditions worsened, many of these projects delayed their launches. 

By late 2023 and into 2024, these delayed projects began launching en masse, resulting in over 1 million new tokens entering the market between April and June 2024. 

According to Deutscher, this created an environment where the sheer volume of token supply outpaced demand, translating into poor performance in the altcoin market as the market’s purchasing power was reduced.

Dhuipala’s comments came as most altcoins have underperformed throughout the third quarter, failing to reach highs from earlier in the year. 

While some altcoins experienced brief gains due to favorable macroeconomic events, the majority of tokens in that market were well below their previous highs at press time.

Hopes of alt season fade

Meanwhile, Bitcoin’s dominance has steadily risen since late 2022 and was sitting at 56.81% at press time. 

This growing dominance has led many analysts on X to believe that an “altseason” — a period when altcoins outperform Bitcoin — is unlikely shortly as investor interest and capital are being concentrated in Bitcoin.

Prominent crypto analyst ‘il Capo of Crypto’ suggested that BTC needs to retest the $48,000 – $50,000 mark before altcoins perform an altcoin rally can be expected.

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