Bankless started cashing out crazily. What stage has the market entered now?

Original title:Local Tops: what makes the market go up and down
Original author: mikeykremer, technical director of MessariCrypto
Original compilation: zhouzhou, BlockBeats

The following is the original content (the original content has been edited for ease of reading and understanding):

Alpha debut: BanklessVC’s disgusting behavior clearly shows that we have entered the “extractive PvP phase” of the market. Protect yourself and your profits. I suspect this cycle has peaked and this is just a natural correction reflecting the crypto market looking for pain points to milk, but these pain points are likely to persist for a while.

Tokens like Virtuals, ai16z, and heyanon may make new highs during the recovery period, but they also face narrative risks. Keep re-evaluating your market concept.

Why does the market go up?

The market rises because new funds enter the market. Obviously, from now on, I will use the concept of "wealth effect" to describe the process of new funds entering the market. We all want cryptocurrencies to create real value in the world and allow us to share in that growth through monetary expansion. Here are a few ways to achieve this:

1. Create wealth through innovation (airdrop)

Airdrops have become a powerful value redistribution mechanism in the crypto market, able to bring significant wealth effects and benefit a wide range of participants. For example, the Uniswap airdrop in September 2020 set the industry standard, distributing 400 UNI tokens (worth approximately $1,400 at the time of issuance) to more than 250,000 addresses, with a total value ultimately exceeding $900 million.

The Jito airdrop in December 2023 was an early catalyst for the Solana meme coin bull run.

The Jito airdrop distributed 90 million JTO tokens worth $165 million at launch, with some users receiving up to $10,000 in rewards just by transferring $40 worth of JitoSOL. The Jito airdrop drove growth in Solana’s total locked value and increased on-chain activity. This wealth effect promotes the adoption and growth of the broader Solana ecosystem, just as Uniswap’s UNI token catalyzed the growth of DeFi.

Jupiter’s token distribution method further demonstrates the inclusive potential of airdrops. They plan to distribute 700 million JUP tokens to more than 2.3 million eligible wallets, making it one of the most widely distributed airdrops in crypto history. Jupiter’s airdrop strategy aims to expand its ecosystem by incentivizing long-term participation and governance participation. These airdrops have shown remarkable efficiency in expanding market participation.

The wealth effect is not limited to direct financial gains, these airdrops turn users into stakeholders, allowing them to participate in governance and protocol development. This shift creates a virtuous cycle in which benefited players reinvest wealth into the ecosystem, further driving market expansion and innovation.

These strategic allocations have proven to be powerful market catalysts, triggering broader bull cycles in their respective sectors. For example, Uniswap's airdrop ignited the DeFi summer of 2020, and its distribution drove a wave of innovation in the field of decentralized finance. Likewise, the Jito airdrop in December 2023 became a turning point for the Solana ecosystem, driving TVL growth and triggering unprecedented on-chain activity.

This surge in liquidity and market confidence laid the foundation for the subsequent memecoin explosion, with the market achieving significant growth. These airdrops effectively act as stimulus packages across the entire ecosystem, creating a self-reinforcing cycle of investment and innovation that defines the era of their respective markets.

Wealth accumulation (marginal buyer)

When positive catalysts such as strategic airdrops appear in the market, participants who had previously waited and watched will be attracted to enter the market with new capital and enthusiasm. The influx of these marginal buyers forms a virtuous cycle of market expansion and innovation.

The airdrop inspired major positive FOMO, driving new and existing users to engage more deeply in the market.

Investors who were originally on the sidelines began to invest capital after witnessing the successful airdrop and subsequent market momentum, transforming from spectators to active participants. This shift from cash to cryptoassets represents truly new money entering the ecosystem, rather than a simple transfer between existing players.

Large financial institutions are increasingly facilitating this shift. Companies like BlackRock, Fidelity and Franklin Templeton have launched products that connect traditional finance with digital assets. The participation of these institutions helps to legitimize the market and provides a more convenient entrance for waiting funds to enter. This expansion creates a positive-sum environment with new players contributing to overall market growth.

Unlike a zero-sum trading environment, markets with active new players create real wealth effects through expanded liquidity, increased development activity, and broader adoption. This positive feedback loop attracts more money on the sidelines, further fueling the growth of the ecosystem.

3. Wealth is created through leverage (multiple expansion)

In the terminal stage of a bull market, leverage becomes the main driver of price increases, marking the market's shift from value creation to value multiplication. As the market enters the price discovery phase, traders increasingly use leverage to enlarge their positions, creating a self-reinforcing upward momentum cycle.

When Bitcoin enters a price discovery phase above all-time highs, leverage ratios expand significantly as traders try to maximize their exposure. This triggers a knock-on effect, with borrowed stablecoins driving further buying, raising prices and encouraging more leveraged positions. This multiplier effect accelerates price movements.

The growing popularity of leverage has also introduced systemic vulnerabilities into the market, with the likelihood of chain liquidations increasing as more traders take leveraged positions, especially as borrowing stablecoins becomes more expensive and difficult to obtain.

The rise in stablecoin borrowing costs is a key indicator that the market has entered its final phase, marking the transition from organic growth to leverage-driven expansion, where the market is no longer creating new value but simply multiplying existing value through debt.

At this stage, the heavy reliance on leverage puts the market in a dangerous position, where sudden price fluctuations can trigger large-scale liquidations, leading to rapid price corrections. This fragility signals that the bull market is nearing its end, as markets increasingly rely on borrowed funds rather than fundamental value creation.

What makes the market go down?

When money leaves the market, the market goes down, obviously. This is essentially the reversal of the wealth effect, with speculators taking advantage of market sentiment, smart money pulling out to lock in profits, and dumb money being hurt by liquidations.

Wealth is being extracted from the market and you are going through this

phase

The crypto ecosystem frequently goes through cycles of value extraction, with savvy operators devising various strategies to extract funds from enthusiastic market participants. Rather than innovations that allocate value, these strategies systematically drain liquidity from the market through a variety of predatory mechanisms.

The most disgusting part of the Bankless story is that they sucked thousands of SOL out of the ecosystem for only 2 SOL.

The recent launch of the Aiccelerate DAO further demonstrates the evolution of this phenomenon. Despite the support of high-profile advisors such as Bankless founders and industry veterans, the project faced criticism upon launch as insiders who obtained tokens began selling off without a lock-up period. Even well-known projects can become vehicles for rapid value extraction.

Star tokens are also prime examples of this predatory behavior, with these projects ending the memecoin bull cycle by transferring wealth from retail buyers to insiders through malicious smart contracts and organized sell-offs. Such value extraction incidents severely damage market confidence and hinder the entry of compliant players.

Not only do these actions fail to build a sustainable ecosystem, they create a cycle of distrust that prevents the entire cryptocurrency ecosystem from maturing.

Rather than reinvesting profits into the growth of the ecosystem, these programs systematically drain liquidity from the market. Withdrawn funds often leave the crypto ecosystem entirely, reducing the total amount of capital available for legitimate projects and innovation.

From obvious scams to sophisticated operations backed by reputable institutions, this trend is alarming. When high-profile institutions engage in rapid value extraction, it becomes increasingly difficult for market participants to distinguish legitimate projects from sophisticated scams.

2. Only sellers

Does it surprise you that BAYC peaked in 3 months?

When the market began to decline, a clear asymmetry emerged between veteran players and retail participants. The former can quickly detect market turns, while the latter is still immersed in optimistic narratives. The characteristic of this stage is not the inflow of new capital, but the orderly withdrawal of liquidity by experienced traders.

Professional traders and investment firms are reducing their exposure while remaining optimistic. Venture capital firms have quietly cashed out through over-the-counter transactions and strategic exits to preserve capital without disrupting the market. This operation creates the illusion of market stability, even as large amounts of money quietly exit the system.

“Smart money” also began to withdraw liquidity from DeFi protocols and trading platforms. This subtle but ongoing withdrawal of funds has made market conditions increasingly fragile, although the impact is not immediately apparent to the casual observer.

It looks like some smart money is getting out of the market, and the psychology of denial: While veteran players secure profits, retail investors often remain convinced that the dip is just a temporary buying opportunity.

This cognitive dissonance is reinforced by:

Social media echo chambers maintain optimistic narratives

Dependence on unrealized gains in bull markets

Misinterpretation of the "Diamond Hand" mentality

Most retail investors miss the best time to exit and usually hold on to the initial decline in an attempt to justify their decisions. By the time a downward trend becomes apparent, much value has been lost and selling pressure intensifies as panic spreads.

The continued withdrawal of professional capital has caused the deterioration of market conditions, and the impact of each subsequent sell order on the price has become increasingly obvious. This deterioration in market depth often goes unnoticed until large price movements expose systemic vulnerabilities.

Unlike a positive-sum environment in a bull market where new money comes in, this phase represents pure value destruction, with capital systematically exiting the crypto ecosystem and remaining participants forced to bear mounting losses.

Leverage explosion (liquidation chain reaction)

The final stages of market capitulation revealed the devastating effects of over-leverage, as Warren Buffett famously said: “It’s only when the tide goes out that you find out who was swimming naked.” The most dramatic crashes in crypto markets clearly illustrate this this principle.

The collapse began in June 2022 with the collapse of 3AC's $10 billion hedge fund. Their leveraged positions, including $200 million in LUNA and significant exposure to Grayscale Bitcoin Trust, triggered a chain reaction of forced liquidations. The fund's failure exposed a tangled web of interconnected loans, with more than 20 institutions affected by its defaults.

FTX’s collapse further illustrates the dangers of hidden leverage. Alameda Research borrowed $10 billion of FTX clients' funds, creating an unsustainable leverage structure that ultimately led to the collapse of both institutions. It was revealed that 40% of Alameda’s $14.6 billion in assets was locked in the illiquid FTT token, further exposing the vulnerability of its leveraged position.

The collapse triggered widespread market contagion effects. The collapse of 3AC led to the bankruptcy of multiple cryptocurrency lending platforms, including BlockFi, Voyager, and Celsius. Likewise, FTX’s collapse triggered a domino effect within the industry, with many platforms freezing withdrawals and ultimately filing for bankruptcy.

Chain liquidations reveal the true face of market depth. As leveraged positions were forced to liquidate, asset prices plummeted, triggering further liquidations, creating a vicious cycle. This exposes that behind the seemingly stable market, it relies more on leverage than real liquidity.

When the tide goes out it reveals that many institutions that thought they were savvy were actually swimming naked, lacking proper risk management and being over-leveraged. The interconnected nature of these positions means that a failure could trigger a system-wide crisis, exposing the fragility of the entire crypto ecosystem.

Looking Ahead - Narrative Risk

The title of this article is somewhat provocative. My gut tells me that this market correction is healthy, albeit a little painful, and that the market will rebound. My price targets, specifically for Bitcoin, remain high - but I have taken my chips off the table and locked in Bitcoin gains that I am willing to carry with me into the next cycle. If this is indeed the end of the cycle, remember: no one goes bankrupt taking profits.

I have written several times (Article 1, Article 2, and Article 3) about the importance of following the market narrative and avoiding getting stuck in old coins. The longer the market goes down, the more the narrative changes. If the market fully recovers tomorrow morning, I expect Cryptocurrency, ai16z, and Cryptocurrency to still continue to lead. But if the market recovery takes longer, then you should focus on emerging currencies and try to attract the attention of new funds.

What I’m telling you is, don’t be biased against the coins you own, and don’t insist on holding them through these downturns (unless you really have strong convictions). Even if they hit new highs, I bet you'll lose a lot of potential gains by not converting to new coins in a timely manner.

The only reason anyone would post a Fibonacci chart is to convince themselves (and others) that they could sell at a higher price.