The world of cryptocurrency liquidity funds is facing a pivotal moment. Despite their sophisticated strategies and institutional backing, the majority of these funds are struggling to generate returns that surpass even the most basic benchmark in the space: Bitcoin.
In this in-depth analysis—based on insights from leading liquidity providers and market analysts—we explore why outperforming Bitcoin has become an almost insurmountable challenge, how structural market forces are reshaping investment strategies, and what lies ahead for crypto’s professional trading ecosystem.
The Benchmark Dilemma: Why Bitcoin Is the Gold Standard
At their core, crypto liquidity funds operate much like traditional hedge funds—they take directional or market-neutral positions, allocate capital, and aim to beat a benchmark. But unlike equity funds that measure performance against the S&P 500, the ultimate yardstick in crypto is simple: did you outperform Bitcoin?
👉 Discover how top traders are redefining crypto performance benchmarks in 2025.
Consider this: Bitcoin surged approximately 110% in 2024, driven by macro adoption, spot ETF approvals, and growing institutional inflows. Any fund that failed to match—or ideally, exceed—this return is considered underperforming, regardless of absolute gains.
This reality hits hard when you examine the broader market. While Bitcoin has stabilized near all-time highs, altcoins across Layer 1s, DeFi, AI tokens, and memecoins have entered prolonged correction phases. As a result, many liquidity managers are seeing flat or negative net returns, even with active trading strategies.
Bitcoin’s Dominance: A Structural Shift, Not a Temporary Trend
Bitcoin’s growing dominance isn’t just a price story—it reflects a fundamental shift in market structure and investor behavior.
Currently, Bitcoin accounts for 63% of the total $3.3 trillion crypto market cap, up significantly from the 40–45% range seen at the peak of the previous cycle in late 2021. This resurgence underscores its positioning as a macro-resilient, institution-grade digital asset—often referred to as “digital gold.”
As Cosmo Jiang of Pantera Capital observes:
“We’re at a critical inflection point on Bitcoin’s adoption S-curve. With ETFs and even strategic government reserves accelerating inflows, Bitcoin is decoupling from the broader crypto market. Last year, it attracted more capital inflow than the Nasdaq’s QQQ ETF—an astonishing milestone most market participants still underestimate.”
This divergence creates a tough environment for liquidity funds. When Bitcoin rises on macro tailwinds while altcoins stagnate or bleed value, funds heavily exposed to non-BTC assets face headwinds—even if their trade execution is flawless.
The Altcoin Supply Tsunami: A Looming Crisis
One of the primary reasons liquidity funds are struggling? An overwhelming wave of token unlocks across major altcoin projects.
Arthur Cheong of Defiance Capital highlights a troubling imbalance:
“Outside of Ethereum, we’re looking at nearly $1 billion in monthly token unlocks over the next two years across L1/L2 protocols, DeFi platforms, DePIN networks, and AI-related projects. Yet demand for these tokens remains extremely weak.”
This supply glut is exacerbated by several factors:
- Vesting schedules from past fundraising rounds (ICOs, private sales, airdrops) are reaching maturity.
- Many projects are incentivizing early investors and team members to sell into strength.
- Retail enthusiasm has waned after consecutive bearish quarters.
Even deep-pocketed liquidity funds find it difficult to absorb such massive sell pressure without impacting prices.
Min Jung, a research analyst at Presto, adds:
“Project teams are offering large OTC sales at 30–40% discounts just to move tokens. And yet, they struggle to find buyers. The market is pricing in further downside across most altcoin sectors.”
The End of ‘Rising Tides’: Why Past Strategies No Longer Work
In previous cycles, the phrase “when Bitcoin pumps, everything pumps” was gospel. Altcoins would often 2x or 3x faster than BTC during bull runs, rewarding aggressive exposure.
That era appears to be over.
👉 See how smart money is adapting to the new ‘selective alpha’ environment in crypto markets.
Today’s market demands precision. Liquidity funds can no longer rely on broad beta exposure to generate returns. Instead, they must identify true fundamental winners—protocols with sustainable revenue models, strong developer activity, and real-world usage.
Presto previously estimated that maintaining price stability for the top 10 tokens launched in 2024—including STRK, ENA, JUP, and ONDO—would require $60 billion in sustained buying pressure**. With total capital across all liquidity funds estimated at just **$10–15 billion, that gap is impossible to close without coordinated institutional demand.
Rethinking Benchmarks: Is Bitcoin Still the Right Measure?
Some investors are beginning to question whether Bitcoin should remain the default benchmark.
Jon Charbonneau of DBA argued on the 0xResearch podcast that a more appropriate benchmark might be a weighted basket of major altcoins like ETH, SOL, and BNB—assets that represent innovation layers beyond store-of-value use cases.
However, this view remains controversial. For now, most investors and allocators still see Bitcoin as the foundational asset of the ecosystem. Its regulatory clarity (via ETFs), liquidity depth, and macro narrative make it the safest entry point for institutional capital.
That means liquidity funds must either:
- Go heavily overweight on high-conviction altcoins (with increased risk),
- Or adopt market-neutral strategies like arbitrage, market making, or volatility harvesting.
Yet even neutral strategies are under pressure due to reduced trading volumes and tighter spreads across decentralized exchanges.
What’s Next? Key Questions for the Future
As we look ahead, several critical questions will shape the evolution of crypto liquidity funds:
- Can any fund consistently generate alpha in a Bitcoin-dominated market?
- Are traditional hedge fund models adaptable to crypto’s unique volatility and transparency?
- Has the four-year cycle narrative lost relevance in a post-ETF world?
- And crucially—have Layer 1s lost their valuation premium to application-specific chains and modular architectures?
These topics will be explored in depth in the upcoming second part of this series via the 0xResearch newsletter.
Frequently Asked Questions (FAQ)
Q: Why is Bitcoin used as the benchmark for crypto liquidity funds?
A: Because it’s the most liquid, widely adopted, and institutionally recognized crypto asset. Most allocators expect funds to beat BTC returns to justify management fees and active risk-taking.
Q: Can liquidity funds profit during altcoin downturns?
A: Yes—through short-selling, options strategies, or market-neutral plays. However, limited borrowing availability and exchange support make consistent shorting difficult.
Q: What are token unlocks, and why do they hurt prices?
A: Token unlocks refer to scheduled releases of previously locked tokens (e.g., for team members or investors). When large volumes hit the market without matching demand, prices typically drop due to oversupply.
Q: Are all liquidity funds underperforming?
A: Not all—but most directional funds are. Market-neutral or specialized funds focusing on specific niches (e.g., perpetual futures arbitrage) have seen more stable returns.
Q: How much capital do crypto liquidity funds manage collectively?
A: Estimates range between $10 billion and $15 billion—a fraction of traditional finance but significant within crypto. Still, it's dwarfed by Bitcoin ETF inflows alone.
Q: Is there still opportunity for alpha generation in crypto?
A: Absolutely—but it requires deeper fundamental analysis, faster execution, and focus on underfollowed sectors like restaking, intent-based architectures, or privacy-preserving layers.
👉 Access advanced tools used by top liquidity providers to navigate today’s asymmetric markets.
The era of easy returns in crypto is over. The new reality demands rigor, selectivity, and a clear-eyed view of where true value resides. For liquidity funds willing to adapt, opportunities remain—but only for those who can move beyond Bitcoin mimicry and uncover real innovation.