IOSG: Why Has the Season of "Buy with Eyes Closed" Shitcoins Become History?

Original Article Title: "IOSG Weekly Brief | Reflections on the Shitcoin Season of this Cycle #292"

Original Article Author: Jiawei, IOSG Venture

Introduction

▲ Source: CMC

Over the past two years, the market's focus has always been drawn to one question: Will the Shitcoin Season come again?

Compared to Bitcoin's strength and the institutionalization process, the performance of the vast majority of shitcoins has been lackluster. Most of the existing shitcoins have seen a 95% decrease in market cap compared to the previous cycle, and new coins shrouded in many halos are also mired in a quagmire. Ethereum has also experienced a long period of emotional downturn until recently when it saw a recovery driven by trading structures such as the "Coin-Stock Pattern."

Even in the context of Bitcoin continuously hitting new highs and Ethereum catching up and relatively stabilizing, the overall market sentiment towards shitcoins remains low. Every market participant is looking forward to the market replaying the spectacular epic bull run of 2021.

The author puts forward a core argument here: the "flood-like irrigation" and months-long widespread bull market of 2021, with its macro environment and market structure, no longer exist — this is not to say that the Shitcoin Season will not come, but rather it is more likely to unfold in a slow bull market environment, with a more differentiated form.

The Fleeting 2021

▲ Source: rwa.xyz

The external market environment of 2021 was very unique. In the shadow of the COVID-19 pandemic, central banks around the world were printing money at an unprecedented rate and injecting this cheap capital into the financial system, suppressing the yield of traditional assets, and suddenly people found themselves with a lot of cash.

Driven by the pursuit of high returns, funds started flowing massively into risky assets, and the crypto market became a key destination. The most obvious point is the sharp expansion of stablecoin issuance, soaring from around $20 billion at the end of 2020 to over $150 billion at the end of 2021, a more than 7x increase during the year.

Internally in the crypto industry, after DeFi Summer, the infrastructure of on-chain finance is being laid out, the concepts of NFTs and the metaverse come into the public eye, public chains and scaling solutions are also in an incremental stage. At the same time, the supply of projects and tokens is relatively limited, with high concentration of attention.

Using DeFi as an example, at that time, the number of blue-chip projects was limited, with only a few protocols such as Uniswap, Aave, Compound, Maker representing the entire sector. Investors found it easy to choose, and capital was more easily coordinated to drive the overall sector up.

These two points provided fertile ground for the 2021 altseason.

Why "Opportunities Rarely Repeat Themselves"

Setting aside macro factors, the market structure has undergone several significant changes compared to four years ago, in the author's opinion:

Rapid expansion of token supply

▲ Source: CMC

The wealth creation effect in 2021 attracted a large amount of capital into the space. Over the past four years, the exuberance of venture capital has inadvertently driven up the average valuation of projects, the prevalence of airdrop economies, and the viral spread of memecoins, all contributing to a sharp acceleration in token issuance and soaring valuations.

▲ Source: Tokenomist

Unlike most projects in 2021 that were in a high-circulation state, mainstream projects in the current market generally face significant token unlock pressure, with only memecoins being an exception. According to TokenUnlocks, just in 2024-2025, over $200 billion in market cap tokens are set to unlock. This is also the current state of the industry in this cycle, widely criticized for its "high FDV, low circulation."

Dispersal of attention and liquidity

▲ Source: Kaito

In terms of attention, the above image randomly captures the mindshare of Pre-TGE projects on Kaito. Among the top 20 projects, we can identify no fewer than 10 niche tracks. If asked to summarize the main narratives in the 2021 market in a few words, most people would likely say "DeFi, NFT, GameFi/Metaverse." However, in the past two years, the market seems to make it challenging for us to immediately react and describe it in a few words.

In this scenario, funds swiftly switch between different tracks, and the durations are short. The crypto community is overwhelmed by an abundance of information, with various groups mostly discussing different topics. This fragmentation of attention makes it challenging for capital to coordinate as it did in 2021. Even if a certain track sees a good rally, it's tough to spread to other areas, let alone drive a broad market uptrend.

From a liquidity perspective, a fundamental of the altcoin season is the spillover effect of profit-taking funds: liquidity first flows into mainstream assets like Bitcoin and Ethereum, and then begins to seek higher potential returns in altcoins. This overflow and rotation of funds provide sustained buying support for long-tail assets.

This seemingly self-evident situation is something we have not seen in this cycle:

Firstly, the institutions and ETFs driving the rise of Bitcoin and Ethereum will not further deploy funds into altcoins; these funds prefer custody-ready and compliant top assets and related products, which marginally reinforce the network effect of top assets rather than uniformly raise the water level across the board.

Secondly, most retail participants in the market may not even hold Bitcoin or Ethereum but have been deeply trapped in altcoins over the past two years, lacking excess liquidity.

Lack of Breakthrough Applications

Behind the frenzy of the 2021 market surge, there was actually some support. DeFi brought fresh vitality to the long-standing blockchain application exhaustion; NFTs spread the creator and celebrity effect beyond the crypto circle, with incremental expansion from new users and new use cases from outside the circle (at least that's how the story goes).

After four years of technical and product iteration, we found that while the infrastructure was overbuilt, there are few applications that truly break through the circle. Meanwhile, the market is growing and becoming more pragmatic and sober—amid narrative fatigue, the market needs to see real user growth and sustainable business models.

Without a continuous influx of fresh blood to support the ever-expanding token supply, the market can only sink into a stock game vortex, which fundamentally fails to provide the foundation needed for a broad-based bull market.

Outlining and Envisioning This Altcoin Season

The altcoin season is coming, but it won't be like the one in '21.

Firstly, the basic logic of profit-taking fund flows and sector rotation exists. We can observe that after Bitcoin hits $100K, the short-term upward momentum significantly weakens, and funds will start looking for the next target. The same goes for Ethereum after.

Secondly, in a market with long-term liquidity shortages, held altcoins are trapped, and capital needs to find a way out. Ethereum is a good example: Has the fundamental of Ethereum changed this cycle? The hottest applications, Hyperliquid and pump.fun, did not emerge on Ethereum; the concept of the "world computer" is also a long time ago.

Internal liquidity shortage, only external begging. Driven by DAT, accompanied by ETH's more than tripled increase, many stories about stablecoins and RWA have finally found the most realistic foundation.

The author envisions the following scenario:

Fundamentals-driven certainty market

▲ Source: TokenTerminal

In an uncertain market, funds instinctively seek certainty.

Funds will flow more towards projects with fundamentals and PMF, whose price appreciation may be limited but are relatively more robust and have high certainty. For example, DeFi blue-chips like Uniswap and Aave, even in a market downturn, still maintain good resilience; Ethena, Hyperliquid, and Pendle then emerge as rising stars in this cycle.

Potential catalysts may include governance actions such as opening fee switches and more.

These projects share the commonality that they can generate significant cash flow, and their products have been adequately validated by the market.

Strong Asset Beta Opportunity

When a market leader (such as ETH) starts to rise, funds that missed this uptrend or seek higher leverage will look for highly correlated "proxy assets" to gain Beta returns. For example, UNI, ETHFI, ENS, and more. They can amplify ETH's volatility but may have relatively lower sustainability.

Repricing of old tracks under mainstream adoption

From institutional Bitcoin buying, ETFs, to DAT models, the main narrative of this cycle is the adoption of traditional finance. If stablecoin growth accelerates, assuming a 4x growth to reach $1 trillion, these funds will likely partially flow into DeFi, driving a repricing of its value in the market. Moving from crypto-native financial products into the traditional finance purview will reshape the valuation framework of DeFi blue-chips.

Localized ecosystem hype

▲ Source: DeFiLlama

Due to its consistently high discussion heat, user stickiness, and the convergence of incremental funds, HyperEVM may see a few weeks to months of wealth effect and Alpha in the growth cycle of ecosystem projects.

Celebrity Project Valuation Discrepancy

▲ Source: Blockworks

Using pump.fun as an example, after the hype of the coin launch recedes, the valuation returns to a conservative range and market discrepancies emerge, if the fundamentals continue to show a strong momentum, there may be an opportunity for a rebound. In the medium term, pump.fun, as a leader in the meme sector while also having revenue as fundamental support and a buyback mechanism, may outperform most top meme projects.

Conclusion

The era of blindly buying during the 2021 meme season is now history. The market environment is becoming relatively more mature and differentiated— the market is always right, and as investors, we can only continuously adapt to this change.

In addition to the above, the author also makes a few predictions as a conclusion:

After traditional financial institutions enter the crypto world, their capital allocation logic is completely different from that of retail investors—they need explainable cash flows and benchmarkable valuation models. This allocation logic directly benefits DeFi's expansion and growth in the next cycle. DeFi protocols, in order to attract institutional funds, will be more proactive in fee distribution, buybacks, or dividend-bearing designs in the next 6–12 months.

In the future, valuation logic based solely on TVL will shift to cash flow distribution logic. We can see some recently launched DeFi institutional products, such as Aave's Horizon, allowing collateralized tokenized U.S. Treasury bonds and institutional funds to borrow stablecoins.

With the increasing complexity of the macro interest rate environment and the traditional financial sector's demand for on-chain yields, standardized, productized revenue infrastructure will become a gem in hand: interest rate derivatives (such as Pendle), structured product platforms (such as Ethena), and yield aggregators will benefit.

A risk DeFi protocols face is traditional institutions leveraging their brand, compliance, and distribution advantages to launch their own regulated "walled garden" products that compete with existing DeFi. This can be seen from Tempo, a blockchain launched by Paradigm and Stripe.

The future altcoin market may tend towards "barbellization," with liquidity flowing to two extremes: one end being blue-chip DeFi and infrastructure. These projects have cash flows, network effects, and institutional recognition, absorbing the majority of funds seeking stable appreciation. The other end is purely high-risk preference chips—memecoins and short-term narratives. These assets do not carry any fundamental narrative but serve as high-liquidity, low-threshold speculative tools, meeting the market's demand for extreme risk and returns. Projects in between, with some product but shallow moats and bland narratives, if liquidity structures do not improve, their market positioning may become awkward.