The main fundamental flaws of cryptocurrencies are now becoming apparent, and this is the primary reason for the poor performance of altcoins in this cycle. Currently, there seems to be no solution, and the findings from all the data I have analyzed are 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 what the future holds.
Let’s take you back to 2021, when the market was in a frenzy. New liquidity rapidly poured into the market, mainly driven by retail investors. The bull market seemed unstoppable, and risk appetite reached its peak.
During this time, venture capital firms started pouring unprecedented amounts of money into the space.
Founders and venture capitalists are opportunists, just like retail investors.
The increase in investment is a natural response of capitalism to market conditions.
For those unfamiliar with the private market, simply put, venture capital firms inject funds into projects at the early stages (usually 6 months to 2 years before launch) at relatively low valuations (with equity attached). This investment helps provide funding for the project to develop, and venture capital firms often provide additional services/connections to assist with project launches.
Interestingly, the first quarter of 2022 was the biggest quarter in history for venture capital funding ($12 billion). 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.
With low entry barriers and the high upside potential of cryptocurrencies in a bull market, Web3 became a hotbed for new startups. New token offerings flooded the market, resulting in 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 crushed the market. So, what did all these projects that raised funds earlier this year do?
They procrastinated, repeatedly delaying. Launching a project in a bear market is like a death sentence, low liquidity + negative sentiment + lack of interest meant many new bear market launches were dead on arrival. So the founders decided to wait for a turnaround. It took some time, but eventually, they waited until Q4 2023. (Remember, the peak of venture capital funding was in Q1 2022, 18 months ago).
After months of delays, they finally launched their tokens under better conditions, and one by one, they started.
It wasn’t just old projects deciding to launch. Many new players also saw the new bull market conditions as an opportunity to start projects and make quick profits. Thus, the number of new products in 2024 reached a historic high.
Here are some mind-boggling statistics. Over 1 million new cryptocurrency tokens have been launched since April (with half of them being meme coins based 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 the case, but it’s still a crazy number.
For more accurate figures, refer to the chart below from CoinGecko, which excludes many smaller meme coins.
The number of cryptocurrency tokens we currently have is 5.7 times higher than the peak of the bull market in 2021.
This is a big problem and one of the main reasons why cryptocurrencies have been struggling this year, despite $BTC hitting 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 the supply pressure is continuously stacking in each subsequent year (2022, 2023, 2024).
Current estimates suggest there is approximately $150-200 million of new supply pressure every day, and this sustained selling pressure has a huge impact on the market.
Think of token dilution as inflation. If the government prints more dollars, it correspondingly reduces the purchasing power of the dollar relative to goods and services.
It’s the same in cryptocurrencies. If you print more tokens, it correspondingly reduces the purchasing power of cryptocurrencies relative to other currencies like the dollar.
The dispersion of altcoins is essentially the cryptocurrency version of inflation. It’s not just a problem of the number of tokens being issued; the low FDV/high circulation mechanism of many new projects is also a big issue.
This leads to a) high dispersion and b) continuous supply pressure.
If there were new liquidity entering the market, all these new launches and supply 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) The massive dilution/selling pressure from unlocks.
Now that you know what the problem is, let’s discuss the current issues.
So, how can things improve? First and foremost, there needs to be more liquidity in cryptocurrencies.
Relatively speaking, there are too many venture capital firms. The imbalance in the private market is the biggest (and most disruptive) issue in cryptocurrencies, especially compared to other markets like stocks and real estate. This imbalance becomes a problem because retail investors feel like they cannot win. If they feel they cannot win, they won’t participate in the game.
Why do you think meme coins have dominated this year? It’s the only way retail investors feel they have a shot.
As the price discovery for many high FDV tokens happens in the private market, retail investors don’t have the opportunity to get returns of 10x, 20x, or 50x like venture capital firms.
In 2021, you could buy a launchpad token and get a return of 100x. This time around, tokens launch with market caps of $5 billion, $10 billion, $20 billion, and there’s no price discovery space on 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 distribution.
Teams can prioritize community allocation and provide larger pools for real users.
Higher percentages can be unlocked at launch (possibly implementing measures like staggered sell taxes to prevent dumping).
Even if insiders don’t enforce change, the market will eventually do so. The market always self-adjusts and corrects, and the power of current meta data may weaken and public reaction may change the landscape in the future.
Ultimately, a more retail-friendly market benefits everyone. It benefits projects, venture capital firms, exchanges, and more users.
Most of the current issues are symptoms of short-sightedness (and the industry being in its early stages). Additionally, on the exchange side, I would like to see exchanges be more pragmatic. One way to counter the immense listing/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-environmental changes, or killer applications that people genuinely want to use, there are still plenty of potential catalysts.
I hope I can explain recent price movements to those who are confused. Dispersion is not the only issue, but it certainly is a major one and needs to be addressed.
