Why are altcoins underperforming this cycle?
The answer will shock you..
A significant fundamental crypto flaw is starting to emerge, and it's the main reason why altcoins are underperforming this cycle. This issue currently seems to have no fix.
Let's rewind to 2021. The market was booming, with new liquidity pouring in rapidly, driven primarily by fresh retail investors. The bull market seemed unstoppable, and risk appetite was at an all-time high.
During this time, venture capitalists (VCs) started injecting unprecedented amounts of capital into the space. Founders and VCs, much like retail investors, seized the opportunity presented by these favorable market conditions.
For those unfamiliar with private markets, VCs typically invest in projects at an early stage (6 months to 2 years prior to launch) at lower valuations, often with vesting periods attached. This funding helps projects develop, and VCs provide additional support to get them off the ground. The largest quarter ever for VC funding was Q1 2022, marking the start of the bear market. But remember, VCs are only investors. The increase in deal volume also came from the surge in new projects being created, as the low barriers to entry and high potential upside made web3 a fertile ground for startups.
However, the party soon came to an abrupt end. A cascade of events, starting with LUNA and ending with FTX, decimated the market. Projects that had raised substantial funds earlier in the year chose to delay their launches. Launching a project during a bear market is often a death sentence due to low liquidity, bad sentiment, and lack of interest. So, many projects waited for better conditions.
By Q4 2023, they finally got their chance. After months of delays, projects began to launch their tokens. This led to a historic number of new launches in 2024. Over 1 million new crypto tokens have been launched since April, with many being meme coins created on the Solana network. Excluding these smaller memes, the number of crypto tokens has increased 5.7 times since the peak bull market in 2021.
This explosion of new tokens has created a major problem: increased supply pressure on the market. Many projects from 2021 are still unlocking, with supply stacking across subsequent years (2022, 2023, 2024). Current estimates suggest around $150m-$200m of new supply pressure per day. This constant sell pressure significantly impacts the market, similar to how inflation reduces purchasing power in traditional currencies.
The crypto market's version of inflation—altcoin dispersion—is causing the market to struggle despite Bitcoin hitting new all-time highs. The sheer volume of tokens being launched, combined with the low liquidity, creates a situation where the market is flooded with supply but lacks the demand to absorb it.
To address this issue, several measures could be taken. Exchanges could enforce better token distribution, teams could prioritize community allocation and bigger pools for genuine users, and higher percentages could be unlocked on launch to disincentivize dumping. A more retail-friendly market would benefit everyone, including projects, VCs, and exchanges, by bringing more users into the space.
Additionally, exchanges could help by delisting dead projects that soak up valuable liquidity, giving retail investors a reason to return. Whether through a Bitcoin pump, an ETH ETF, macroeconomic shifts, or killer apps, there are many potential catalysts that could revive the market.
The path forward involves understanding these dynamics and working towards solutions that ensure the market can grow sustainably and inclusively, benefiting all participants.
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Written by Timothy Assi, a popular investor on eToro. Follow & copy my portfolio:
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