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2.52 million altcoins are ruining the future of cryptocurrencies
A glaring problem in the cryptocurrency market is becoming apparent. The proliferation of altcoins, with over 2.52 million created, is choking the industry.
This unprecedented growth in new tokens, while initially a sign of a booming market, now poses significant challenges.
2.52 million new tokens created
In 2020, the cryptocurrency market was in a frenzy. Liquidity has increased thanks to retail investors and venture capitalists (VCs) poured in money in the field. VCs, in particular, have invested heavily, contributing to the development of numerous projects.
Will Clemente, co-founder of Reflexivity Research, reflected on how the strategy was simple at the time. Investors had to do it allocate capital to high beta altcoins and enjoy the ride as they outperformed Bitcoin.
“In 2020, if you get out of the risk spectrum, those things are going to have a higher beta than Bitcoin and you’re going to get long all the vaporware and all that stuff is going to go up,” Clemente explained
This trend continued into 2022, when VC funding reached up a record $11.1 billion in the first quarter alone. However, this wave of new capital has led to an unsustainable increase in the number of altcoins.
Venture capital investments in cryptocurrencies. Source: PitchBook
The number of tokens tripled between 2020 and 2022, but the subsequent bear market hit hard. High-profile failures, such as the collapses of LUNA and FTX, caused widespread market turbulence. Projects that had raised significant funds chose to delay their launch, waiting for more favorable market conditions.
By late 2023, market sentiment had improved, triggering a surge in new altcoin launches. This resurgence continued into 2024, with beyond introduced one million new tokens since April. As a result, the total number of altcoins has reached 2.52 million across different blockchains.
“Nearly 1 million new crypto tokens were created in the last month, a number that is double the total number ever created on Ethereum from 2015 to 2023,” said Coinbase Director Conor Grogan She said.
To know more: 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 staggering.
How Altcoins Are Hurting Cryptocurrencies
This deluge of new tokens is problematic. The more altcoins flood the market, the greater the cumulative supply pressure.
Estimates suggest that new supplies worth an additional $150 million to $200 million enter the market every day. This constant selling pressure depresses prices, similarly 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 US 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 cryptocurrencies,” 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 capital constant influx of new tokensleading to price suppression.
To know more: What are the best Altcoins to invest in June 2024?
This could be one of the reasons retail investors are reluctant engage, feeling at a disadvantage compared to VCs.
In previous cycles, retail investors could earn significant returns. Now, tokens often launch at high valuations, leaving little room for growth, and subsequently get lost when they begin their unlock programs.
“The private market bias is one of the biggest problems with cryptocurrencies, 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.
Addressing 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.
To know more: Top 10 Altcoin Trades 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 VCs and exchanges.
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