Small-cap tokens fall to four-year lows, is the "Shanzhai Bull" completely hopeless?

Written by: Gino Matos

Translated by: Luffy, Foresight News

Since January 2024, the comparison of cryptocurrency and stock performance indicates that the so-called new “shanzhai coin trading” is essentially just an alternative to stock trading.

In 2024, the S&P 500 index returned about 25%, and in 2025, it reached 17.5%, with a cumulative two-year increase of approximately 47%. Meanwhile, the Nasdaq 100 index increased by 25.9% and 18.1% respectively, with a total gain close to 49%.

The CoinDesk 80 Index, tracking 80 assets outside the top 20 by market cap, plummeted 46.4% in the first quarter of 2025 alone. As of mid-July, it had fallen about 38% year-to-date.

By the end of 2025, the MarketVector Digital Assets 100 Small Cap Index dropped to its lowest level since November 2020, wiping out over $1 trillion in total cryptocurrency market value.

This divergence in trends is not merely a statistical error. The overall shanzhai coin asset portfolio not only posted negative returns but also exhibited volatility comparable to or even higher than stocks; in contrast, major U.S. stock indices achieved double-digit growth with controlled drawdowns.

For Bitcoin investors, the core question is: does allocating to small-cap tokens actually deliver risk-adjusted returns? Or, in other words, does such an allocation merely maintain a correlation similar to stocks while exposing investors to additional negative Sharpe ratio risk? (Note: The Sharpe ratio is a key measure of risk-adjusted return, calculated as: annualized portfolio return minus the risk-free rate divided by the annualized volatility.)

Choosing a Reliable Shanzhai Coin Index

To analyze this, CryptoSlate tracked three shanzhai coin indices.

The first is the CoinDesk 80 Index launched in January 2025, which covers 80 assets outside the CoinDesk 20 Index, providing a diversified investment basket beyond Bitcoin, Ethereum, and other leading 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-oriented product rather than a tradable benchmark, offering a clear sell-side quantitative perspective on the small-cap asset group.

These three depict different aspects of the market: the overall shanzhai asset portfolio, high-beta small-cap tokens, and a quantitative research perspective. Yet, their conclusions are highly consistent.

In stark contrast, benchmark stock market performance shows a completely different trend.

In 2024, the U.S. major indices gained about 25%, with double-digit gains in 2025, and relatively limited drawdowns. During this period, the maximum intra-year drawdown of the S&P 500 was only in the high single digits, and the Nasdaq 100 maintained a strong upward trend.

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

Conversely, the overall shanzhai coin index performed very differently. According to CoinDesk’s report, the CoinDesk 80 Index plummeted 46.4% in the first quarter alone, while the broader MarketCap-tracking CoinDesk 20 Index declined 23.2%.

By mid-July 2025, the CoinDesk 80 Index had fallen 38% intra-year, while the CoinDesk 5 Index, tracking Bitcoin, Ethereum, and three other major coins, gained 12% to 13% over the same period.

Andrew Baehr of CoinDesk, in an interview with ETF.com, described this phenomenon as “completely correlated, yet vastly different in profit and loss performance.”

The correlation between the CoinDesk 5 and CoinDesk 80 indices is as high as 0.9, indicating their price directions are fully aligned, yet the former saw modest double-digit growth, while the latter nearly lost 40%.

It’s proven that holding small-cap shanzhai coins offers minimal diversification benefits, while the performance costs are extremely heavy.

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

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

Looking at 2024’s shanzhai coin performance, the Kaiko 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 among a few top coins, such as SOL and Ripple. Although the total trading volume share of shanzhai coins temporarily rebounded to the highs of 2021 in 2024, 64% of trading volume was concentrated among the top ten shanzhai coins.

The cryptocurrency market’s 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 shanzhai coin indices not only have negative returns but also exhibit volatility comparable to or even higher than stocks.

The CoinDesk 80 Index experienced a 46.4% drop in a single quarter; the MarketVector small-cap index, after another round of decline, fell to pandemic lows in November.

The overall shanzhai coin index repeatedly experienced catastrophic, index-level drawdowns: in 2024, the Kaiko small-cap index fell over 30%; in Q1 2025, the CoinDesk 80 Index plummeted 46%; and by the end of 2025, the small-cap index again dropped to 2020 lows.

In contrast, the S&P 500 and Nasdaq 100 achieved cumulative returns of 25% and 17% over two years, with maximum drawdowns only in the mid-high single digits. The U.S. stock market, though volatile, remains generally manageable; by comparison, the volatility of cryptocurrency indices is highly destructive.

Even if one considers the high volatility of shanzhai coins as a structural feature, their risk-adjusted return from 2024 to 2025 remains far below that of holding the U.S. stock market indices.

From 2024 to 2025, the overall shanzhai coin index had a negative Sharpe ratio; in contrast, the S&P and Nasdaq indices showed strong Sharpe ratios before volatility adjustments. After adjusting for volatility, the gap further widens.

Bitcoin Investors and Cryptocurrency Liquidity

The first insight from this data is the trend of liquidity concentration and migration toward high-value assets. Both Bloomberg and Whalebook reports on the MarketVector small-cap index indicate that since early 2024, small-cap shanzhai coins have continued underperforming, with institutional funds flowing into Bitcoin and Ethereum ETFs.

Combined with Kaiko’s observations, despite the rebound of total trading volume share to 2021 levels, funds are concentrated among the top ten shanzhai coins. The market trend is very clear: liquidity has not completely exited the crypto market but has shifted toward high-value assets.

The former shanzhai coin bull market was essentially a basis trading strategy, not a structural asset outperformance. In December 2024, CryptoRank’s shanzhai coin bull market index surged to 88 points, then collapsed to 16 points by April 2025, completely erasing gains.

The 2024 shanzhai coin bull market ultimately turned into a typical bubble burst; by mid-2025, the entire shanzhai coin portfolio nearly gave back all gains, while the S&P and Nasdaq continued their compounded growth.

For wealth managers and asset allocators considering diversification outside Bitcoin and Ethereum, CoinDesk’s data offers a clear case reference.

As of mid-July 2025, the CoinDesk 5 index tracking the large market cap assets achieved a small double-digit increase, while the diversified shanzhai coin index CoinDesk 80 plunged nearly 40%. The correlation between them is as high as 0.9.

Investors holding small-cap shanzhai coins have not gained substantive diversification benefits but instead have suffered losses in absolute returns and higher drawdown risks compared to Bitcoin, Ethereum, and U.S. equities, all while remaining exposed to the same macro drivers.

Current capital views most shanzhai coins as tactical trading targets rather than strategic assets. From 2024 to 2025, Bitcoin and Ethereum spot ETFs offered notably better risk-adjusted returns, and U.S. equities also performed well.

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

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

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

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

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

In contrast, the overall shanzhai coin index not only yielded negative returns and larger drawdowns but also maintained high correlation with large-cap crypto tokens and stocks, failing to provide investors with any additional diversification.

Institutional capital has always chased performance. The five-year return of the MarketVector small-cap index was -8%, while the large-cap index gained about 380%. This disparity reflects capital’s ongoing migration toward assets with clear regulation, abundant derivatives liquidity, and robust custody infrastructure.

The first quarter drop of 46% in the CoinDesk 80 Index, along with a 38% intra-year decline in mid-July, indicates that the trend of capital shifting toward high-value assets is not only persistent but accelerating.

For Bitcoin and Ethereum investors evaluating whether to allocate to small-cap cryptocurrencies, the data from 2024 to 2025 provides a clear answer: the absolute returns of the overall shanzhai coin portfolio underperform U.S. stocks, risk-adjusted returns are lower than Bitcoin and Ethereum; despite a high correlation of 0.9 with large-cap crypto tokens, they fail to offer any meaningful diversification benefits.