The main fundamental flaws of cryptocurrencies are becoming evident, which is the primary reason for the poor performance of altcoins in this cycle. Currently, there seems to be no solution, and the data I have uncovered is shocking.
The purpose of this tweet is to provide you with more insights into the biggest issues with cryptocurrencies. It will accurately explain how we got to this point, why prices are behaving this way, and the future path.
Let me take you back to 2021, a time when the market was booming. New liquidity was rapidly entering the market, driven mainly by retail investors. The bull market seemed unstoppable, and risk appetite was at its peak.
During this time, venture capital firms started pouring unprecedented amounts of money into the space.
Founders and venture capitalists were opportunists, just like retail investors.
The increase in investments was a natural response of capitalism to market conditions.
For those unfamiliar with the private market, simply put, venture capital firms invest money into projects at an early stage (typically 6 months to 2 years before launch) at a relatively low valuation (with equity attached). This investment helps fund the project’s development, and venture capital firms often provide additional services/connections to aid in the project’s launch.
Interestingly, the first quarter of 2022 saw the highest amount of venture capital funding ever (12 billion USD). This marked the beginning of the bear market (yes, venture capitalists timed it right).
But remember, venture capitalists are just investors, and the increase in trading volume comes from the increase in the number of projects being created.
Low entry barriers, coupled with the high upside potential cryptocurrencies exhibited during the bull market, made Web3 a hotbed for new startups. New token launches were rampant, leading to a doubling of the total number of cryptocurrency tokens between 2021 and 2022.
But soon, the party came to a halt. A series of contagions, starting from LUNA and ending with FTX, completely destroyed the market. So, what did all these projects that raised all that money earlier this year do?
They procrastinated, repeatedly delaying. Launching a project in a bear market is equivalent to a death sentence. Low liquidity + negative sentiment + lack of interest meant many new bear market launches were already dead on arrival. So, founders decided to wait for a reversal. It took some time, but eventually, in the fourth quarter of 2023, they got it (remember, the peak of venture capital was in Q1 2022, 18 months ago).
After months of delay, they could finally launch their tokens under better conditions, and they did, one after another.
It wasn’t just old projects deciding to launch. Many new players saw the new bull market conditions as an opportunity to start projects and make quick money. So, the number of new products in 2024 reached an all-time high.
Here are some mind-boggling statistics. Over a million new cryptocurrency tokens have been released since April (with half of them being meme coins created on the Solana network).
You could argue that these numbers are inflated due to the ease of deploying meme coins on-chain. And that is indeed true, but it’s still a crazy number.
For more accurate figures, refer to the data from CoinGecko, which excludes many smaller meme coins.
We now have 5.7 times the number of cryptocurrency tokens compared to the peak of the 2021 bull market.
This is a big problem and one of the main reasons cryptocurrencies have been struggling this year, despite BTC reaching new all-time highs.
Why?
Because the more tokens are released, the greater the cumulative supply pressure in the market, and this supply pressure is “stacked.”
Many projects from 2021 are still unlocking, and supply pressure keeps piling up in each subsequent year (2022, 2023, 2024).
Current estimates suggest there is a new supply pressure of around $150-200 million per day. This sustained selling pressure has a huge impact on the market.
Think of token dilution as inflation. If the government prints more dollars, it will correspondingly decrease the purchasing power of the dollar relative to goods and services.
The same goes for cryptocurrencies. If you print more tokens, it will correspondingly decrease the purchasing power of cryptocurrencies relative to other currencies like the USD.
The proliferation of altcoins is essentially the cryptocurrency version of inflation. It’s not just the issue of the number of tokens being issued; the low FDV/high circulating supply mechanism of many new launch projects is also a big problem.
Because this leads to a) high decentralization and b) continuous supply pressure.
If new liquidity were entering the market, all these new launches and supplies would be manageable. In 2021, there were hundreds of new launches every day, and everything was going up. However, that’s not the case now. So, we find ourselves in the following situation:
A) Not enough new liquidity entering the market;
B) Massive dilution/selling pressure from unlocking.
Now that you know what the problem is, let’s discuss the current issues.
So, how can things turn around? First and foremost, I must emphasize the need for more liquidity in the cryptocurrency space.
Relatively speaking, there are too many venture capital firms. The imbalance in the private market is one of the biggest (and most disruptive) issues in cryptocurrencies, especially compared to other markets like stocks and real estate. This imbalance becomes a problem because retail investors feel they can’t win. If they feel they can’t win, they won’t play the game.
Do you wonder why meme coins dominated this year? It’s the only way retail investors feel they have a chance.
Due to the price discovery of many high FDV tokens happening in the private market, retail investors don’t have a chance to get 10x, 20x, or 50x returns like venture capital firms.
In 2021, you could buy a launchpad token and get a 100x return. This time around, tokens launch with market caps of 50 billion, 100 billion, 200 billion and there’s no room for price discovery in the public market.
Then they start unlocking, and the prices keep dropping. I don’t have the answer to this problem. It’s a complex issue, and there are many participants who can make changes.
However, I have some ideas here.
Exchanges can implement better token distributions.
Teams can prioritize community allocations and provide larger pools for real users.
Higher percentage unlocks at launch (possibly implementing measures like staggered selling taxes to prevent dumping).
Even if insiders don’t enforce changes, the market will eventually do so. The market always self-adjusts and corrects, and the power of current meta data may weaken, leading to a change in the future due to public reactions.
Ultimately, a more retail-friendly market benefits everyone. It’s good for projects, venture capital firms, exchanges, and more users.
Most of the current issues are symptoms of short-term thinking (and the industry being in its early stages). Additionally, on the exchange side, I’d like to see exchanges become more pragmatic. One way to counter the massive influx of new listings/dilution is to ruthlessly delist as well. Let’s clear out the 10,000 dead projects still absorbing valuable liquidity.
The market needs to give retail investors a reason to come back, and that would solve at least half of the problem. Whether it’s a BTC rally, ETH ETF, macro environment changes, or killer applications that people actually want to use. There are still many potential catalysts.
I hope I have provided some explanation for those confused by recent price trends. Decentralization is not the only problem, but it is certainly a major one and one that needs to be discussed.
