Altcoins
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 stifling the industry.
This unprecedented growth of new tokens, while initially a sign of a booming market, now poses significant challenges.
2.52 million new tokens created
In 2020, the crypto market was in a frenzy. Liquidity has increased as retail investors and venture capitalists (VC) invested money in industry. Venture capital companies, in particular, have invested heavily, contributing to the development of many projects.
Will Clemente, co-founder of Reflexivity Research, explained how simple the strategy was at the time. Investors had to allocate capital into high beta altcoins and enjoy the ride as they outperformed Bitcoin.
“In 2020, you go on the risk spectrum, these things are going to have a higher beta than Bitcoin and you just get long, all the vaporware and stuff goes up,” Clemente explained.
This trend continued in 2022 when venture capital financing reached a record $11.1 billion in the first quarter alone. However, this influx of new capital has led to an unsustainable increase in the number of altcoins.
Venture capital investment in crypto. Source: Presentation book
The number of tokens tripled between 2020 and 2022, but the ensuing bear market hit hard. High-profile failures, such as collapses of LUNA and FTX, caused widespread market disruption. Projects that had raised significant funds chose to delay their launch, awaiting more favorable market conditions.
By the end of 2023, market sentiment had improved, triggering an increase in the number of new altcoin launches. This resurgence continued until 2024, with more than one million new tokens introduced since April. Therefore, the total number of altcoins reached 2.52 million across different blockchains.
“There have been nearly 1 million new crypto tokens created in the past month, a number that is 2x the total number ever created on Ethereum from 2015 to 2023,” said Conor Grogan, director of Coinbase. said.
Learn more: 7 Hot Meme Coins and Altcoins Trending in 2024
While these numbers may be inflated due to the ease of creating meme coins, the volume of new tokens is staggering.
How Altcoins Are Hurting Crypto
This deluge of new tokens is problematic. The more altcoins flooding the market, the greater the cumulative supply pressure.
Estimates suggest that additional new supply worth $150 million to $200 million is entering the market daily. This constant selling pressure drives prices down, much like inflation in traditional economies. As more altcoins are created, their value relative to other currencies decreases.
“Think of token dilution as inflation. If the government prints U.S. dollars, this in turn reduces the purchasing power of the dollar relative to the cost of goods and services. It’s exactly the same in crypto,” crypto analyst Miles Deutscher explain.
Many of these new tokens have low fully diluted valuations (FDV) and high float, which exacerbates supply pressure and dispersion. This environment would be manageable if new liquidity entered the market.
However, in the absence of new capital, the market must absorb the constant influx of new tokensleading to price compression.
Learn more: What are the best Altcoins to invest in June 2024?
This could be one of the reasons why retail investors are reluctant get involved, feeling at a disadvantage compared to venture capital firms.
In previous cycles, retail investors could make significant returns. Now, tokens are often launched at high valuations, leaving little room for growth, and then bleed out as their unlock schedules begin.
“Private market orientation is one of the biggest problems in crypto, especially compared to other markets like stocks and real estate. This bias becomes a problem because retail feels like it can’t win,” Deutscher concluded.
Solving this problem 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.
Learn more: 10 Best Altcoin Exchanges in 2024
The current state of the market 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 venture capital firms and stock exchanges.
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