Despite a correlation of up to 0.9 with the broader crypto market tokens, small-cap tokens have failed to provide any diversification value. In Q1 2025, they plummeted 46.4%, with an annual decline of about 38%, while the US stock market indices achieved double-digit growth with controlled pullbacks. This article is based on an original piece by Gino Matos, organized, translated, and written by ForesightNews.
(Background: Current state of the altcoin ETF market: XRP as the biggest winner, LTC and DOGE abandoned by the market)
(Additional context: Earning $50 million in one year by targeting altcoins on DEX)

Table of Contents

• Choose a reliable altcoin index
• Sharpe ratio and drawdown
• Bitcoin investors and crypto liquidity
• What does this mean for liquidity in the next market cycle?

Despite a correlation of up to 0.9 with the broader crypto market tokens, small-cap tokens have failed to provide any diversification value. Since January 2024, the performance comparison between cryptocurrencies and stocks indicates that the so-called new “altcoin trading” is essentially just an alternative to stock trading.

In 2024, the S&P 500 index returned about 25%, reaching 17.5% in 2025, with a cumulative increase of approximately 47% over two years. During the same period, the Nasdaq 100 index gained 25.9% and 18.1%, with a total increase close to 49%.

The CoinDesk 80 index, which tracks 80 assets outside the top 20 by market cap, only in Q1 2025 plummeted 46.4%. By mid-July, its year-to-date decline was about 38%.

By the end of 2025, the MarketVector Digital Assets 100 Small Cap Index fell to its lowest level since November 2020, causing the total crypto market cap to evaporate over $1 trillion.

This divergence is far from a statistical anomaly. The overall altcoin portfolio not only has negative returns but also exhibits volatility comparable to or even higher than stocks; in contrast, the US stock indices achieved double-digit growth with manageable drawdowns.

For Bitcoin investors, the core question is: can allocating to small-cap tokens generate risk-adjusted returns? Or is this allocation merely taking on additional risk of negative Sharpe ratio while maintaining a similar correlation to stocks? (Note: The Sharpe ratio is a key metric for risk-adjusted returns, calculated as: annualized portfolio return – risk-free rate / annualized volatility.)

Choose a reliable altcoin index

For analysis, CryptoSlate tracked three altcoin indices.

The first is the CoinDesk 80 index launched in January 2025, covering 80 assets outside the CoinDesk 20 index, providing a diversified investment basket beyond Bitcoin, Ethereum, and other top tokens.

The second is the MarketVector Digital Assets 100 Small Cap Index, which selects the 50 smallest market cap tokens from a basket of 100 assets, serving as a barometer for “junk assets” in the market.

The third is the small-cap index launched by Kaiko, a research product rather than a tradable benchmark, offering a clear seller-side quantitative perspective on small-cap assets.

These three indices depict different market perspectives: the overall altcoin portfolio, high-beta small-cap tokens, and a quantitative research view, yet their conclusions are highly consistent.

In contrast, the stock market benchmarks show a completely different trend.

In 2024, the US stock market indices achieved about 25% gains, with double-digit growth in 2025 and relatively limited pullbacks. During this period, the maximum drawdown of the S&P 500 was only in the mid to high single digits, while the Nasdaq 100 maintained a strong upward trend.

Both major indices achieved compounded annual returns without significant profit retracement.

The overall altcoin index, however, performed very differently. According to CoinDesk reports, the CoinDesk 80 index dropped 46.4% in Q1 alone, while the CoinDesk 20 index tracking the broader market declined 23.2%.

By mid-July 2025, the CoinDesk 80 index was down 38% year-to-date, whereas the CoinDesk 5 index tracking Bitcoin, Ethereum, and three other major coins gained 12% to 13% in the same period.

Andrew Baehr of CoinDesk described this phenomenon in an ETF.com interview as “completely correlated, but with vastly different performance outcomes.”

The high correlation of 0.9 between the CoinDesk 5 and CoinDesk 80 indices indicates they move in the same direction, yet the former experienced slight double-digit growth, while the latter nearly fell 40%.

It has been proven that holding small-cap altcoins offers minimal diversification benefits, while the performance cost is extremely high.

The performance of small-cap assets is even worse. According to Bloomberg, by November 2025, the MarketVector Digital Assets 100 Small Cap Index had fallen to its lowest level since November 2020.

Over the past five years, this small-cap index returned about –8%, while the corresponding large-cap index surged approximately 380%. Institutional capital clearly favors large-cap assets, avoiding tail risk.

Looking at 2024, Kaiko’s small-cap index declined over 30% for the year, and mid-cap tokens also struggled to keep pace with Bitcoin’s gains.

Market winners are highly concentrated in a few top coins, such as SOL and Ripple. Although the total trading volume of altcoins temporarily rebounded to 2021 levels in 2024, 64% of trading volume was concentrated in the top ten altcoins.

Crypto market liquidity has not disappeared but has shifted toward high-value assets.

Sharpe ratio and drawdown

From a risk-adjusted return perspective, the gap widens further. The CoinDesk 80 index and various small-cap altcoin indices not only have deep negative returns but also exhibit volatility comparable to or higher than stocks.

The CoinDesk 80 index plummeted 46.4% in a single quarter; the MarketVector small-cap index, after another downturn, fell to pandemic lows in November.

The overall altcoin index repeatedly experienced catastrophic drawdowns: in 2024, the Kaiko small-cap index declined over 30%; in Q1 2025, the CoinDesk 80 index plunged 46%; and by the end of 2025, the small-cap index again fell to 2020 lows.

In contrast, the S&P 500 and Nasdaq 100 achieved cumulative returns of 25% and 17%, respectively, over two years, with maximum drawdowns only in the mid to high single digits. The US stock market, despite volatility, remains generally manageable; crypto indices, however, are highly volatile and destructive.

Even if the high volatility of altcoins is considered a structural feature, their risk-adjusted return from 2024 to 2025 remains far below that of holding the US stock market indices.

From 2024 to 2025, the overall altcoin index had a negative Sharpe ratio; in contrast, the S&P and Nasdaq indices performed strongly without adjusting for volatility. After volatility adjustment, the gap between them widens further.

Bitcoin investors and crypto liquidity

The first insight from these data is the trend of liquidity concentration and migration toward high-value assets. Bloomberg and Whalebook reports on the MarketVector small-cap index both indicate that since early 2024, small-cap altcoins have underperformed continuously, with institutional funds flowing into Bitcoin and Ethereum ETFs.

Combined with Kaiko’s observations, although the trading volume share of altcoins has risen back to 2021 levels, capital is concentrated in the top ten altcoins. The market trend is very clear: liquidity has not fully exited the crypto market but has shifted toward high-value assets.

The previous altcoin bull market was essentially a basis trading strategy, not a structural asset outperformance. In December 2024, CryptoRank’s altcoin bull market index soared to 88 points, then crashed to 16 points in April 2025, completely erasing the gains.

The 2024 altcoin bull market ultimately turned into a classic bubble burst; by mid-2025, the entire altcoin portfolio had nearly given back all gains, while the S&P and Nasdaq continued to compound.

For financial advisors and asset allocators considering diversification outside Bitcoin and Ethereum, CoinDesk’s data provides a clear case reference.

As of mid-July 2025, the CoinDesk 5 index tracking the market achieved a modest double-digit increase, while the diversified altcoin index CoinDesk 80 plunged nearly 40%, with a correlation of 0.9.

Allocating to small-cap altcoins has not yielded substantial diversification benefits but has instead exposed investors to much higher return losses and drawdown risks compared to Bitcoin, Ethereum, and US stocks, while still being subject to the same macroeconomic drivers.

Currently, most capital views altcoins as tactical trading targets rather than strategic assets. From 2024 to 2025, Bitcoin and Ethereum spot ETFs delivered significantly better risk-adjusted returns, and US stocks also performed well.

The liquidity in the altcoin market is increasingly concentrated in a few “institutional-grade” tokens, such as SOL, Ripple, and other select tokens with independent positive catalysts or clear regulatory prospects. Asset diversity at the index level is being squeezed by the market.

2025, the S&P 500 and Nasdaq 100 indices rose about 17%, while the CoinDesk 80 crypto index fell 40%, and small-cap cryptocurrencies declined 30%

What does this mean for liquidity in the next market cycle?

The market performance from 2024 to 2025 tests whether altcoins can achieve diversification value or outperform the market in an environment of rising macro risk appetite. During this period, US stocks achieved two consecutive years of double-digit growth with manageable drawdowns.

Bitcoin and Ethereum gained institutional recognition through spot ETFs and benefited from regulatory easing.

In contrast, the overall altcoin index not only underperformed with negative returns and larger drawdowns but also maintained high correlation with the broader crypto market tokens and stocks, yet failed to provide corresponding risk premiums.

Institutional capital has always chased performance. The five-year return of the MarketVector small-cap index is –8%, while the large-cap index surged about 380%. This gap reflects capital shifting toward assets with clear regulation, ample liquidity in derivatives markets, and robust custody infrastructure.

The CoinDesk 80 index plummeted 46% in Q1 and recorded a 38% decline by mid-July, indicating that the trend of capital moving toward high-value assets is not reversing but accelerating.

For Bitcoin and Ethereum investors evaluating whether to allocate to small-cap tokens, the data from 2024 to 2025 provides a clear answer: the absolute returns of the overall altcoin portfolio underperform US stocks, and risk-adjusted returns are lower than those of Bitcoin and Ethereum. Despite a high correlation of 0.9 with the broader crypto market tokens, they fail to offer any diversification benefits.