Markets
2.52 Million Altcoins Are Ruining the Future of Crypto
A glaring problem in the cryptocurrency market is becoming evident. The proliferation of altcoins, with more than 2.52 million created, is suffocating the industry.
This unprecedented growth of new tokens, while initially a sign of a booming market, now presents significant challenges.
2.52 million new tokens created
In 2020, the crypto market went through a frenzy. Liquidity increased as retail and venture capitalists (VCs) poured money in the industry. VCs, in particular, have invested heavily, contributing to the development of numerous projects.
Will Clemente, co-founder of Reflexivity Research, reflected on how simple the strategy was back then. Investors needed allocate capital to high beta altcoins and enjoy the ride as they outperform Bitcoin.
“In 2020, you get into the risk spectrum, these things will have a higher beta for Bitcoin and you just buy all the vaporware and all these things go up,” Clemente explained.
This trend continued into 2022, when venture capital funding Reached a record US$11.1 billion in the first quarter alone. However, this flood of new capital has led to an unsustainable rise in the number of altcoins.
Venture capital investment in crypto. Source: Proposal book
The number of tokens tripled between 2020 and 2022, but the subsequent bear market was hit hard. High-profile failures such as the LUNA and FTX collapses, caused widespread turbulence in the market. Projects that raised substantial funds chose to postpone their launch, pending more favorable market conditions.
In late 2023, market sentiment improved, triggering an increase in the launch of new altcoins. This resurgence lasted until 2024, with more than one million new tokens introduced since April. Consequently, the total number of altcoins has reached 2.52 million across different blockchains.
“There have been nearly 1 million new cryptographic tokens created in the last month, a number that is 2x the total number ever created on Ethereum from 2015 to 2023,” said Coinbase director Conor Grogan. he said.
See more information: 7 Hot Meme Coins and Altcoins That Are Trending in 2024
While these numbers may be inflated due to the ease of creating meme coins, the sheer volume of new tokens is impressive.
How Altcoins Are Hurting Crypto
This deluge of new tokens is problematic. The more altcoins flood the market, the greater the accumulated supply pressure will be.
Estimates suggest that an additional $150 million to $200 million worth of new supplies enter the market daily. This constant selling pressure depresses prices, similar to inflation in traditional economies. As more altcoins are created, their value relative to other currencies decreases.
“Think of symbolic dilution as inflation. If the government prints US dollars, this in turn will reduce the purchasing power of the dollar relative to the cost of goods and services. It’s exactly the same thing in crypto,” said crypto analyst Miles Deutscher. explained.
Many of these new tokens have low fully diluted valuations (FDV) and high float, exacerbating supply pressure and dispersion. This environment would be manageable if new liquidity entered the market.
However, with insufficient new capital, the market is left to absorb the constant flow of new tokensleading to price suppression.
See more information: What are the best Altcoins to invest in in June 2024?
This could be one of the reasons why retail investors are reluctant to get involved, feeling at a disadvantage compared to VCs.
In previous cycles, retail investors were able to achieve significant returns. Now, tokens often launch at high valuations, leaving little room for growth, and subsequently bleed as their unlock timelines begin.
“The bias towards the private market is one of the biggest problems in crypto, especially compared to other markets like stocks and real estate. This distortion becomes a problem because retailers feel they cannot win,” said Deutscher concluded.
Resolving this issue requires concerted efforts from multiple stakeholders. Exchanges could implement stricter token distribution rules and project teams could prioritize community allocations. Additionally, higher percentages of tokens could be unlocked at launch, potentially with mechanisms to discourage dumping.
See more information: 10 Best Altcoin Exchanges in 2024
The current market situation reflects the need for greater pragmatism. Exchanges should consider delisting defunct projects to free up liquidity. The goal should be to create a more retail-friendly environment that benefits everyone, including VCs and exchanges.
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