Reasons for the absence of altcoin season: Decentralization - The hidden threat to the cryptocurrency market

A significant flaw is emerging in the cryptocurrency market, threatening the stability and growth of the crypto market. According to cryptocurrency analyst Miles Deutscher, the underperformance of altcoins in the current cycle is a major reason for this issue, and there doesn't seem to be an immediate solution.

A MAJOR fundamental flaw in crypto is starting to emerge.

It's the #1 reason why altcoins are underperforming this cycle.

And currently, there seems to be no fix.

I just dug through all the data (what I found was shocking).

🧵: How altcoin dispersion is killing crypto.👇

— Miles Deutscher (@milesdeutscher) June 18, 2024

Understanding the Cycle: The Rise and Fall of Bull Markets

2021: The Market Frenzy

Miles Deutscher stated that the highlight of the cryptocurrency market in 2021 was the "influx of new liquidity," meaning money from outside the crypto circle flowed in, primarily driven by retail investors. The bull market at that time seemed unstoppable, with investors willing to take risks. Venture capitalists (VCs) also poured an unprecedented amount of funds into startups and tokens, creating a thriving environment.

By 2023, there were 300 global cryptocurrency venture capital (crypto VC) firms managing $839 billion in the cryptocurrency venture capital industry.

The Role of Venture Capitalists

Miles Deutscher's data shows that venture capitalists make early investments at lower valuations in the 6 months to 2 years before a project launches. This type of investment provides funding for project development and offers additional services and networking. Interestingly, the first quarter of 2022 saw the highest amount of funds from venture capitalists, reaching $12 billion, coinciding with the beginning of a bear market.

Explosive Growth in Cryptocurrency Tokens

Unprecedented Influx of New Tokens

Miles Deutscher noted that the combination of low barriers to entry and high return potential during the bull market led to a significant increase in new tokens. Between 2021 and 2022, the total number of cryptocurrency tokens tripled. However, the subsequent market downturn, along with events like the collapse of LUNA and FTX, caused many projects to delay their launches, waiting for better market conditions.

A Flood of Tokens in 2024

By the fourth quarter of 2023, improved market conditions led to a record number of new tokens being launched in 2024. Since April, over a million new cryptocurrency tokens have been released, with a significant portion being meme coins on the Solana network.

Token Dilution: Persistent Currency Inflation

Supply Pressure and Market Impact

Miles Deutscher pointed out that the influx of new tokens has created significant supply pressure in the market, estimated at around $150-200 million of new supply pressure per day. This continuous selling pressure has a market impact similar to traditional currency inflation.

High FDV and Low Circulation Create Issues

Many new tokens are released with low fully diluted valuations (FDV) and high circulation mechanisms, leading to ongoing supply pressure and dispersion. As a result, the market faces dilution and a shortage of new liquidity.

Miles Deutscher used the term "dispersion" instead of "distributed," which may imply a negative connotation, suggesting that the tokens were widely spread out among all investors in demand initially, and as the supply continues to grow, it leads to oversupply and a lack of demand situation.

Solutions and the Path Forward

Need for More Liquidity

Miles Deutscher believes that to address this issue, the cryptocurrency market needs more liquidity. However, the current trend of leaning towards the private market is causing harm and making retail investors feel deprived.

Improvement Measures

Several measures can help alleviate the problem:

• Exchanges strengthening token distribution management.
• Projects prioritizing community distribution and providing larger pools for real users.
• Implementing a tiered selling tax to prevent dumping.

Many discussions have been held on these solutions in the past. He believes that even if industry insiders do not enforce changes, the market will eventually force change. Markets always self-correct and adjust.

Most current issues are short-sighted. The market needs to give retail investors a reason to return, which at least solves half of the problem.

The Role of Exchanges

He suggests that exchanges need to be more practical, balancing new listings and delistings to clear out projects that are no longer operational and release valuable liquidity.

Conclusion

The issue of token dispersion is a major challenge in the cryptocurrency market. Addressing this problem requires a market that is friendly to retail investors and practical actions from exchanges and projects. While this issue is complex, the market may self-correct over time. Creating a more balanced and sustainable ecosystem as the industry matures will benefit all stakeholders, from projects and venture capitalists to exchanges and retail investors.