What stage has Bankless entered when it starts to cash out like crazy in the current market?

Alpha debut: The disgusting behavior of BanklessVC clearly indicates that we have entered the “exploitative PvP phase” of the market. Protect yourself and your profits. I suspect this cycle has peaked and it is just a natural adjustment, reflecting the crypto market’s search for pain points to exploit, but these pain points may persist for a while.

Tokens like Virtuals, ai16z, and heyanon may create new highs during the recovery period, but also face narrative risks. Keep reassessing your market views.

Why does the market rise?

The market is rising because new funds are entering the market, which is obvious. From now on, I will use the concept of ‘wealth effect’ to describe the process of new funds entering the market. We all hope that encryption currencies can create real value in the world and share this growth through currency expansion. Here are several ways to achieve this goal:

1. Create wealth through innovation (airdrop)

Airdrops have become a powerful value redistribution mechanism in the crypto market, bringing significant wealth effects and benefiting a wide range of participants. For example, the September 2020 Uniswap airdrop set an industry standard, distributing 400 UNI tokens to over 250,000 addresses (valued at approximately $1,400 at issuance), with a total value exceeding $900 million in the end.

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

Jito airdropped 90 million JTO tokens, worth $165 million at the time of issuance, and some users received rewards of up to $10,000 just by transferring $40 worth of JitoSOL. The Jito airdrop has driven the growth of Solana’s total locked value and increased on-chain activities. This wealth effect has facilitated the adoption and development of a wider Solana ecosystem, similar to how Uniswap’s UNI token catalyzed the growth of DeFi.

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

The wealth effect goes beyond direct economic benefits. These airdrops transform users into stakeholders, enabling them to participate in governance and protocol development. This transformation creates a virtuous cycle as benefiting participants reinvest wealth into the ecosystem, further driving market expansion and innovation.

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

The surge in liquidity and market confidence laid the foundation for the subsequent outbreak of meme coins, and the market achieved significant growth. These airdrops effectively serve as stimulus plans covering the entire ecosystem, creating a self-reinforcing cycle of investment and innovation, thereby defining the era characteristics of their respective markets.

Wealth accumulation (marginal buyer)

When the market encounters positive catalysts such as strategic airdrops, it attracts participants who were previously on the sidelines to enter with new capital and enthusiasm. The influx of these marginal buyers forms a virtuous cycle of market expansion and innovation.

Airdrops have sparked major positive FOMO, driving deeper involvement in the market for both new and existing users.

Originally hesitant investors, after witnessing successful airdrops and subsequent market momentum, began to invest capital and transition from spectators to active participants. This shift from cash to encryption assets represents the influx of true new capital into the ecosystem, rather than a simple transfer between existing participants.

Large financial institutions are increasingly driving this shift. Companies like BlackRock, Fidelity, and Franklin Templeton have launched products that connect traditional finance with digital assets. The involvement of these institutions helps legitimize the market and provides a more convenient entry point for cautious investors. This expansion creates a positive environment where new participants contribute to the overall market growth.

Unlike a zero-sum trading environment, a market with active new participants creates a true wealth effect through expanded liquidity, increased development activities, and wider adoption. This positive feedback loop attracts more watchful funds, further driving ecosystem growth.

3. Wealth is created through leverage (multiplier expansion)

At the terminal stage of a bull market, leverage becomes the main driving force for price increases, marking the market’s transition from value creation to value multiplication. As the market enters the price discovery stage, more and more traders use leverage to amplify their positions, forming a self-reinforcing cycle of upward momentum.

When Bitcoin enters a price discovery phase above its historical high, the leverage ratio will significantly expand, and traders will attempt to maximize their exposure. This will trigger a chain reaction, with borrowed stablecoins driving further buying, pushing up prices, and encouraging more leveraged positions. This multiplier effect accelerates price fluctuations.

The increasing popularity of leverage has also introduced systemic fragility to the market. As more traders adopt leveraged positions, the possibility of a cascading liquidation increases, especially when borrowing stablecoins becomes more expensive and difficult to obtain.

The rise in stablecoin lending costs is a key indicator of the market entering its final stage, marking a shift from organic growth to leverage-driven expansion. At this point, the market is no longer creating new value but rather multiplying existing value through debt.

At this stage, a high degree of dependence on leverage has put the market in a dangerous position, sudden price fluctuations may trigger large-scale liquidation, leading to rapid price correction. This vulnerability indicates that the bull market is coming to an end, as the market is increasingly reliant on borrowed funds rather than fundamental value creation.

What makes the market fall?

When capital flows out of the market, the market will decline, it is obvious. This is essentially the reversal of the wealth effect, where speculators take advantage of market sentiment, smart money withdraws to lock in profits, and foolish money suffers losses due to liquidation.

Wealth is being extracted from the market, and you are experiencing this phase

The encryption ecosystem often goes through cycles of value extraction, where savvy operators design various strategies to extract funds from enthusiastic market participants. Unlike innovative value allocation, these strategies systematically drain liquidity from the market through various predatory mechanism.

The most nauseating thing about the Bankless story is that they extracted thousands of SOL from the ecosystem with only 2 SOL.

The recent launch of Aiccelerate DAO further illustrates the evolution of this phenomenon. Despite the support of notable advisors such as the founder of Bankless and industry veterans, the project faced criticism as insiders who received tokens began selling them without a lock-up period. Even well-known projects can become tools for quick value extraction.

Celebrity tokens are also typical examples of this predatory behavior, where these projects transfer wealth from retail buyers to insiders through malicious smart contracts and organized dumping, ending the bull market cycle of meme coins. Such value extraction events severely damage market confidence and hinder the entry of compliant participants.

These behaviors not only fail to establish a sustainable ecosystem, but also create a cycle of mistrust, hindering the mature development of the entire encryption currency ecosystem.

Instead of reinvesting profits in the development of the ecosystem, these plans systematically withdraw liquidity from the market. The extracted funds usually flow out of the encryption ecosystem, reducing the total available capital for legitimate projects and innovations.

From obvious scams to complex operations supported by reputable institutions, this trend is worrying. It becomes increasingly difficult for market participants to distinguish between legitimate projects and complex scams when well-known institutions are involved in rapid value extraction.

2. Only sellers

BAYC peaked after 3 months, are you surprised?

When the market begins to decline, there is an obvious asymmetry between experienced players and retail participants. The former can quickly perceive the market turning, 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 maintain an optimistic attitude externally while reducing exposure. Venture capital firms quietly cash out through over-the-counter trades and strategic exits, preserving capital without affecting the market. This operation creates the illusion of market stability, even if a large amount of funds have quietly withdrawn from the system.

‘Smart money’ is also starting to withdraw liquidity from DeFi protocols and trading platforms. This subtle but ongoing capital outflow is making market conditions increasingly fragile, although this impact may not be immediately apparent to casual observers.

It looks like some smart money is withdrawing from the market, the psychology of denial: when seasoned players secure profits, retail investors often still believe that the decline is just a temporary buying opportunity.

This cognitive dissonance is reinforced in the following ways:

The echo chamber of social media maintains an optimistic narrative.

Relying on unrealized gains in a bull market

Misinterpreting the mindset of ‘diamond hands’

Most retail investors miss the best exit point, often holding on during the early decline, trying to justify their decisions. By the time the downward trend becomes apparent, much of the value has been lost, and with the spread of panic, selling pressure intensifies.

The continued withdrawal of professional capital has led to deteriorating market conditions, and the impact of each subsequent sell order on prices is becoming increasingly evident. This deterioration in market depth is often not noticed until significant price fluctuations expose systemic vulnerabilities.

Unlike the positive environment of new capital entering the bull market, this phase represents pure value destruction, with the capital systematically exiting the encryption ecosystem and the remaining participants being forced to bear increasingly severe losses.

Leverage Explosion (Liquidation Chain Reaction)

The final stage of the market’s surrender reveals the devastating impact of excessive leverage, as Warren Buffett famously said, ‘Only when the tide goes out do you discover who’s been swimming naked.’ The most severe crash in the crypto market clearly exemplifies this principle.

The crash began in June 2022 with the bankruptcy of 3AC’s $10 billion hedge fund. Their leveraged positions, including a $200 million exposure to LUNA and a significant exposure to Grayscale Bitcoin Trust, triggered a chain reaction of forced liquidations. The fund’s failure exposed a complex web of interrelated loan networks, affecting over 20 institutions with its default.

FTX’s collapse further illustrates the dangers of hidden leverage. Alameda Research borrowed $10 billion from FTX clients, creating an unsustainable leverage structure that ultimately led to the collapse of two institutions. The revelation that 40% of Alameda’s $14.6 billion in assets is locked in illiquid FTT tokens further exposes the vulnerability of its leverage positions.

The crash triggered a widespread contagion effect in the crypto market. The bankruptcy of 3AC led to multiple cryptocurrency lending platforms going bankrupt, including BlockFi, Voyager, and Celsius. Similarly, the collapse of FTX caused a domino effect in the industry, with many platforms freezing withdrawals and ultimately filing for bankruptcy.

Chain liquidation reveals the true depth of the market. As leveraged positions are forcibly closed and asset prices plummet, further liquidation is triggered, creating a vicious cycle. This exposes the market’s seemingly stable facade, relying more on leverage than true liquidity.

The ebbing tide revealed that many supposedly savvy institutions were actually swimming naked, lacking proper risk management and over-leveraging. The interconnectedness of these positions means that a failure could trigger a systemic crisis, exposing the vulnerability of the entire encryption ecosystem.

Looking to the Future - Narrative Risk

The title of this article is a bit provocative. My instinct tells me that this market correction is healthy, although painful, but the market will rebound. My price target, especially for Bitcoin, is still high - but I have taken my chips off the table and locked in the Bitcoin gains I am willing to carry into the next cycle. If this is really the end of the cycle, remember: no one goes bankrupt from taking profits.

I have written multiple times (Articles 1, Articles 2, and Articles 3) about the importance of following the market narrative, avoiding being trapped by old coins. The longer the market downturn, the more the narrative will change. If the market completely rebounds tomorrow morning, I expect cryptocurrencies, ai16z, and virtual currencies to continue to lead. But if the market takes longer to recover, then you should focus on emerging currencies to attract new capital’s attention.

What I want to tell you is not to be biased towards the currencies you hold, nor to insist on holding them through these downturns (unless you really have a firm belief). Even if they hit new highs, I bet you will lose a lot of potential returns because you didn’t convert to new currencies in time.

The only reason anyone posts Fibonacci charts is to convince themselves (and others) that they can sell at higher prices.