Messari’s tech lead and on-chain analyst Tulip King recently shared a market analysis via X, noting what makes the crypto market move up and down.

According to the data, we haven’t topped this cycle yet, however, we’re currently in a natural correction stage as the market seems to extract pain, a period which might last a while longer.

The analyst also mentioned assets like VIRTUAL, AI16Z, and HEYANON, which might reach new ATHs again, but as they’re subject to narrative risks, traders are advised to reevaluate their views.

Here’s what you need to know about what makes the crypto market move up and down.

What Makes the Crypto Market Move Upwards

The crypto market moves up when new money enters, and Messari’s analyst refers to new flows entering the market as a “wealth effect.”

What the crypto industry should want is for crypto to create real value or wealth in the world and share this in monetary expansion. This can happen in a few ways:

1. Wealth is Created Via Innovation (Airdrops)

Airdrops are a powerful mechanism for value redistribution in crypto markets, as they create important wealth effects that benefit the broader participants in the industry. The analyst offered more airdrops examples including the ones from Uniswap, Jito, Jupiter

Uniswap Airdrop

For instance, the Uniswap airdrop from September 2020 set the standard, distributing 400 UNI tokens, worth around $1.400 at the launch, to over 250,000 addresses, ultimately reaching over $900 million.

Uniswap’s airdrop catalyzed the DeFi growth.

Jito Airdrop

Another example is the Jito airdrop from December 2023 which distributed 90 million JTO tokens with $165 million at launch. Some users received up to $10,000 from moving just $40 worth of JitoSOL. This airdrop helped drive Solana’s TVL higher, contributing to increased on-chain activity.

The wealth effect stimulated broader Solana ecosystem adoption and development.

Jupiter’s Airdrop

The analyst also mentions Jupiter’s token distribution approach which highlights the democratizing potential of airdrops. They planned the distribution of 700 million JUP tokens to target 2.3 million eligible wallets, which makes this one of the most broadly distributed airdrops in the history of crypto.

This strategy aims to grow Jupiter’s ecosystem, by incentivizing:

• Long-term participation
• Governance involvement

For instance, a user said that the JUP airdrop gave him a chance to grow, highlighting that airdrops are more than free money, they are a chance to change lives.

All these airdrops demonstrate efficiency in expanding market participation.

Airdrops’ Wealth Effect

The wealth effect extends beyond immediate financial gains.

Airdrops transformed users into stakeholders, enabling them to participate in:

• Governance
• Protocol development

This created a cycle where enriched participants reinvest in the ecosystem, funding more market expansion and innovation.

Overall, airdrops are powerful market catalysts, triggering broader bull market cycles.

The Uniswap airdrop triggered the DeFi summer of 2020, starting a wave of innovation across DeFi.

In a similar manner, Jito’s December 2023 airdrop drove Solana’s TVL upwards and catalyzed huge on-chain activity. This surge in liquidity laid the grounds for the following memecoin explosion, with the sector seeing massive growth.

In short, airdrops can be considered ecosystem stimulus packages, creating self-reinforcing cycles of investment and innovation.

2. Wealth is Compounded (Marginal Buyers)

When the crypto markets experience positive catalysts such as airdrops, they attract more participants who bring in fresh capital and enthusiasm.

An Influx of New Marginal Buyers

The influx of these new marginal buyers further contributes to market expansion and innovation. Airdrops can spark positive FOMO, driving new and existing users deeper into the market.

Previously sidelined investors who watch successful airdrops and the rising market momentum deploy new capital and become active participants. This transition from cash to crypto assets represents new money entering the ecosystem, rather than just transfers between existing participants.

Financial Institutions Facilitate the Cash-to-Crypto Transition

Firms like BlackRock, Fidelity, and Franklin Templeton are facilitating the cash-to-crypto transition, creating products that bridge traditional finance with digital assets.

This institutional involvement has the following effects:

• Leads to a legitimization of the crypto market
• Provides easier access for sidelined capital

This expansion creates a positive environment in which new participants contribute to the overall market growth.

Crypto markets energized by new participants create wealth effects via the following:

• Expanded liquidity
• Increased development activity
• Broader adoption

Such positive feedback attracts more participants who support the ecosystem’s growth further.

3. Wealth is Created Via Leverage (Multiple Expansion)

In the final phase of a bullish period, leverage becomes the main driver of price appreciation. This makes the transition from value creation to value multiplication.

As the market enters price discovery, traders employ leverage to amplify their positions, creating a self-reinforcing cycle of upward momentum.

For instance, at the beginning of 2025, Ethereum’s leverage ratio hit a record high of 0.57, overtaking Bitcoin and signaling a growing market risk appetite.

When Bitcoin enters the price discovery phase above historical highs, leverage ratios expand significantly as traders seek to maximize exposure. This leads to a cascade effect where borrowed stablecoins fuel more buying, driving prices higher, and encouraging more leveraged positions.

The increased use of leverage introduces system fragility into the market. As more traders take leveraged positions, the potential for cascading liquidations grows, especially when borrowed stablecoins become more expensive and harder to access.

Rising stablecoin borrowing costs are a key indicator that the market is entering its final phase. 

This is a crucial shift from organic growth to leverage-driven expansion, where no new value is created, but existing value is multiplied through debt. Relying on leverage in this phase creates a situation where sudden price movements can trigger liquidations and rapid price corrections.

This is a vulnerability that can signal that the bull market is nearing its conclusion and the system becomes dependent on borrowed money rather than fundamental value creation.

What Makes the Crypto Market Move Downwards

The crypto market moves down when money leaves, representing the reverse effect. It’s when smart money takes their chips off the table to get profits and people get liquidated.

1. Wealth Is Extracted From the Market

The crypto ecosystem witnesses cycles of value extraction regularly where complex operators design schemes to drain capital from the enthusiastic market participants. Unlike productive innovators who distribute value, these schemes remove liquidity from markets via various predatory mechanisms.

Messari’s analyst brings up Bankless Ventures’ token sale – they drained thousands of SOLs from the ecosystem after investing only 2 SOLs. However, reports note that Bankless co-founders David Hoffman, and Ryan Adams,  said that they were not aware of Bankless Ventures’ 8% fund sale, explaining that they didn’t sell personal shares.

The Aiccelerate DAO launch received backing from advisors such as Bankless founders and industry veterans, but the project received criticism when insiders who received tokens began selling without vesting periods.

Messari’s analyst also notes that celebrity tokens are another example of this predatory behavior. Such projects killed the memecoin cycle by effectively transferring wealth from retail buyers to insiders via malicious smart contracts and coordinated dumps.

The analyst shared a comparison between the DeFi Summer and the memecoin maina – the most extractive crypto phenomenon since the ICO boom.

Such extraction events damage market confidence and deter legit participants. Rather than building sustainable ecosystems, they create cycles of distrust that harm the broader crypto industry.

Instead of reinvesting profits into the development of the ecosystem, such schemes drain liquidity from the market, reducing the total capital for available legitimate projects and innovation.

2. Sellers

When markets debut their downward trend, there is an asymmetry between sophisticated players who recognize the shift and retail participants who remain anchored to bullish narratives. This phase is characterized by the methodical extraction of liquidity by experienced operators.

Professional traders and investment firms reduce exposure while maintaining public optimism. VC firms quietly liquidate positions via OTC markets and strategic exits, preserving capital while avoiding market impact. This creates a facade of stability, although massive capital leaves the system.

Smart money withdraws liquidity from DeFi protocols and trading venues, and this subtle yet steady liquidity drainage creates fragile market conditions, although the impact is not immediately observed by casual viewers.

Here, we have the psychology of denial set in.

Psychology of Denial

While sophisticated players secure profits, retail investors often remain optimistic that dips are buying opportunities. This cognitive dissonance is reinforced by the following elements:

• Social media maintains bullish narratives
• Market participants are attached to unrealized gains from the bull market
• People misinterpret the concept of “diamond hands”

Most retail participants miss optimal exit points, holding through initial declines, and by the time the downtrend becomes obvious, significant value has been lost. Selling pressure intensifies and panic sets in.

Professional capital withdrawal creates deteriorating market conditions, and these often go unnoticed until large price movements reveal the market fragility.

This represents pure value destruction as capital flows out of the ecosystem.

3. Leverage Blows Up (Liquidation Cascades)

The final stage of the market capitulation reveals the devastating impact of excessive leverage. This was captured in Warren Buffet’s statement: “Only when the tide goes out do you discover who’s been swimming naked.”

The most spectacular crypto collapses are the best examples of this kind of blow-up. The 3AC’s $10 billion hedge fund implosion in June 2022 was such an event, when leveraged positions including $200 million in LUNA and significant exposure to Grayscale Bitcoin Trust, triggered a cascade of forced liquidations.

FTX’s 2022 collapse illustrates the dangers of hidden leverage. Alameda Research borrowed $10 billion of FTX customer funds, creating an unsustainable leverage structure that ultimately led to both entities’ downfall.

Such implosions triggered widespread market contagion. For instance, 3AC’s collapse led to the bankruptcy of multiple crypto lenders including BlockFi, Voyager, and Celsius, while FTX’s fall created a domino effect across the industry.

Such liquidations exposed how the market’s apparent stability had been supported by leverage rather than genuine liquidity. This is due to inadequate risk management and excessive leverage.

Looking Forward

The current market cycle might be in a position in which we’re witnessing a healthy, but painful market flush, Messari’s analyst notes. The longer the market downturn extends, the more the narrative will shift.

Predictions for Bitcoin remain high, although caution is required.

However, optimism is present in the crypto markets at the beginning of 2025, considering new, stronger regulations and a more mature ecosystem, amidst rising global adoption.