Analyst: What caused altcoins to perform poorly in this cycle?

Author: Crypto Analyst Miles Deutscher

Compiled by: Mia, ChainCatcher

In the cryptocurrency space, the issue of excessive decentralization of altcoins has gradually become prominent, serving as a core factor for their poor performance in this cycle. After in-depth research, I found that this decentralization poses a serious threat to the overall health of the cryptocurrency market. Unfortunately, it seems that we have yet to find a clear solution to address this challenge.

The purpose of this post is to help more people gain a deeper understanding of this key issue affecting the future development of cryptocurrencies. It will explain how we got here, why prices are behaving this way, and what the future holds.

The Flood of the Cryptocurrency Market: The Token Inflation Concerns Behind the Surge of New Projects

In the cryptocurrency market of 2021, a frenzy atmosphere prevailed. New liquidity surged into the market like a tide, primarily driven by the enthusiastic participation of new retail investors. The bull market during this period seemed unstoppable, and investors' risk tolerance reached unprecedented heights.

During this time, venture capital firms began injecting unprecedented capital into the space. Founders and venture capitalists acted like retail investors; they were opportunists. The increase in investment was a natural capitalist response to market conditions.

For those unfamiliar with private markets, simply put, venture capital (VC) invests in projects at early stages (usually 6 months to 2 years before product launch), when valuations are typically low (and come with vesting clauses).

This investment helps fund projects for development, while venture capital firms often provide other services/connections to help projects launch.

Interestingly, the largest quarterly venture capital funding ever (12 billion USD) occurred in the first quarter of 2022.

This marked the beginning of the bear market (yes, venture capital firms accurately timed the market peak).

But remember, venture capital firms are just investors. The increase in trading volume also comes from the increase in the number of projects being created.

With low entry barriers and the high returns brought by cryptocurrencies during the bull market, Web3 became a breeding ground for new startups. New tokens emerged one after another, leading to a quadrupling of the total number of crypto tokens from 2021 to 2022.

But soon, the party ended. A series of chain reactions, starting with LUNA and ending with FTX, completely destroyed the market.

So, what did those projects that raised so much money at the beginning of the year do?

They delayed.

And delayed.

And delayed.

Launching projects in a bear market is akin to a death sentence.

Low liquidity + poor sentiment + lack of interest meant that many new bear market projects failed as soon as they hit the market.

Thus, founders decided to wait for the market to turn.

Finally, they waited until the fourth quarter of 2023.

(Remember, the largest surge in venture capital funding was in the first quarter of 2022, which was 18 months ago).

After months of delays, these projects finally found the right market conditions to launch their tokens. They sprang into action, launching new projects one after another, continuously entering the market. At the same time, many new players also saw these bullish market conditions as a great opportunity to launch new projects and profit quickly.

As a result, 2024 saw a historic number of new project launches.

Here are some statistics. They are mind-blowing. Since April alone, over 1 million new crypto tokens have been launched. (Half of which are meme tokens created on the Solana network).

According to CoinGecko data, the current number of crypto tokens in the market is 5.7 times that of the peak during the 2021 bull market.

Although Bitcoin (BTC) has reached an all-time high in this cycle, the excessive decentralization of the cryptocurrency market and the massive influx of new projects have become the most pressing issues, and one of the main reasons for the market's continued struggles this year.

Why?

The more tokens that are issued, the greater the cumulative supply pressure in the market.

And this supply pressure is "cumulative."

Many projects from 2021 are still unlocking, with annual supplies "stacking" (2022, 2023, 2024).

Current estimates suggest that there is approximately 150 to 200 million USD of new supply pressure every day.

This ongoing selling pressure has a tremendous impact on the market.

Token dilution can be viewed as inflation. Just as excessive printing of money by the government leads to a decrease in the purchasing power of the dollar relative to goods and services, an excessive supply of tokens in the cryptocurrency market also diminishes the purchasing power of these tokens relative to other currencies (like the dollar). The excessive decentralization of altcoins is essentially the cryptocurrency version of inflation, posing a serious threat to the overall health of the market.

Moreover, the problem is not just the number of newly issued tokens; the low market cap/high circulation mechanism of many new projects is also a significant issue, leading to a) high decentralization, and b) ongoing supply pressure.

If new liquidity were to enter the market, all these new issuances and supplies would be beneficial. In 2021, hundreds of new projects launched daily—and everything was rising. However, that is not the case now. So we find ourselves in the following situation:

A) Insufficient new liquidity entering the market,
B) Huge dilution/selling pressure from unlocks

How Can the Situation Be Turned Around?

First, I must emphasize that a key issue currently facing the cryptocurrency market is the lack of sufficient liquidity. Compared to traditional markets like stocks and real estate, the excessive involvement of venture capital firms (VCs) in the cryptocurrency space has become a significant and harmful problem. This skewed financing model has led retail investors to feel a sense of frustration at not being able to win; if they feel there is no chance of winning, they will not actively participate in the market.

This year, meme tokens have dominated the market precisely because retail investors, feeling a lack of profit opportunities in other areas, turned to a space where they believed they had a chance to win. Since many high FDV (fully diluted valuation) tokens have already undergone most of their price discovery in private markets, retail investors often cannot achieve the same 10x, 20x, or 50x returns as VCs.

In 2021, retail investors had the opportunity to buy tokens from certain launch platforms and truly achieve returns of up to 100x. However, in this cycle, many tokens were issued at extremely high valuations (such as 5 billion, 10 billion, or even over 20 billion USD), leaving almost no room for price discovery in the public market. When the unlock portions of these tokens began to flow into the market, their prices often continued to decline due to the significant increase in supply, posing further challenges for retail investors.

This is a complex and multi-dimensional issue involving various aspects and participants of the cryptocurrency market. While I cannot provide all the exact answers, here are some thoughts and perspectives on the current dynamics of the cryptocurrency market.

• Exchanges can enhance the fairness of token distribution
• Teams can prioritize larger funding pools for community allocation and real users
• A higher percentage can be unlocked at the time of token issuance (possibly implementing measures like tiered sales taxes to prevent selling).

Even if insiders do not enforce these changes, the market will eventually do so. The market always self-corrects and adjusts, and as the effectiveness of the current model wanes and public reactions occur, things may change direction in the future.

Ultimately, a more retail-oriented market benefits everyone. This is true for projects, venture capital, and exchanges. More users benefit everyone. Most of the current problems are symptoms of short-sightedness (and the industry's immaturity).

Additionally, on the exchange front, I also hope to see exchanges become more pragmatic. One way to offset the madness of new listings/dilution is to be equally ruthless about delistings. Let’s clear out the 10,000 dead projects that are still soaking up valuable liquidity.

The market needs to give retail investors a reason to come back. At the very least, this could solve half the problem.

Whether it’s the rise of Bitcoin, Ethereum ETFs, macro shifts, or killer applications that people genuinely want to use.

There are many potential catalysts.

I hope I can help those who have felt confused recently to understand the recent price movements.

Decentralization is not the only issue, but it is certainly a major one—and one that needs to be discussed.