A significant flaw is emerging in the cryptocurrency market, threatening its stability and growth. According to cryptocurrency analyst Miles Deutscher, this issue is primarily due to the underperformance of altcoins in the current cycle, with no immediate solutions in sight.
Understanding the Cycle: Rise and Fall of Bull Markets
2021: Market Frenzy
Role of Venture Capitalists
Explosive Growth of Cryptocurrency Tokens
Unprecedented Emergence of New Tokens
Token Dilution: Continuous Inflation
Supply Pressure and Market Impact
High FDV and Low Circulation Create Issues
Solutions and Path Forward
Need for Increased Liquidity
Improvement Measures
Role of Exchanges
Conclusion
Miles Deutscher noted that the highlight of the 2021 cryptocurrency market was the “influx of new liquidity,” primarily driven by retail investors. The bull market seemed unstoppable at the time, with investors willing to take risks. Venture capitalists (VCs) also poured an unprecedented amount of funds into startups and tokens, creating a prosperous environment.
Stablecoin Issuance Growth Soars
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Aggregated 2023: 300 global crypto VCs managing $83.9 billion in crypto VC industry
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Miles Deutscher’s statistics show that VCs made early investments at lower valuations in the 6 months to 2 years before project launches. This investment provided funding for project development and offered additional services and networks. Interestingly, the first quarter of 2022 saw the peak VC funding at $12 billion, coinciding with the beginning of the bear market.
Peak VC Investment, Prices Begin to Decline
Miles Deutscher states that the combination of low thresholds and high return potentials during bull markets led to a massive increase in new tokens. Between 2021 and 2022, the total number of cryptocurrencies tripled. However, subsequent market downturns, coupled with events like the collapse of LUNA and FTX, caused many projects to delay launches, awaiting better market conditions.
By the fourth quarter of 2023, improved market conditions led to a record number of new token launches in 2024. Since April, over 1 million new crypto tokens have been released, with a significant portion on the Solana network being meme coins.
Miles Deutscher notes that the influx of new tokens has brought significant supply pressure to the market, estimated at approximately $150-200 million in new supply pressure daily. This continuous selling pressure has a market impact similar to inflation in traditional currencies.
Many new tokens were launched with low Fully Diluted Valuations (FDV) and high circulation mechanisms, resulting in ongoing supply pressure and dispersion. The result is a market facing dilution and inadequate new liquidity.
Miles Deutscher uses “dispersion” rather than “distributed” to emphasize that token circulation started with a large volume, dispersed among all interested investors, leading to insufficient demand as supply continues to grow, resulting in oversupply.
Miles Deutscher believes that to address this issue, the cryptocurrency market needs more liquidity. However, the current focus on private markets is damaging, alienating retail investors.
Several measures can help alleviate the problem:
Exchanges strengthening token distribution management.
Projects prioritizing community allocation and providing larger pools for real users.
Implementing graduated selling taxes to deter dumping.
Many of these solutions have been previously discussed. He believes that even if industry professionals do not enforce changes, the market will eventually force change. Markets always self-correct and adjust.
Most current issues are short-term. The market needs to give retail investors a reason to return, solving at least half the problem.
He argues that exchanges need to be more pragmatic, balancing new listings and delistings to clear out defunct projects and release valuable liquidity.
The dispersion issue of altcoins is a major challenge in the cryptocurrency market. Addressing this problem requires exchanges and projects that are friendly to retail investors and take pragmatic measures. Although complex, the market may self-correct over time. Creating a more balanced and sustainable ecosystem will benefit all stakeholders, from projects and venture capitalists to exchanges and retail investors.
Altcoin
Miles Deutscher
Token Economy
Altcoins