in string On Speaking to his massive following, Deutscher explained the impact of the rapid increase in the number of new cryptocurrency tokens, a problem he believes lies at the heart of altcoins' poor performance this cycle.
The spread of encryption
Since April 2024, the cryptocurrency landscape has seen the introduction of over a million new cryptocurrency tokens, a notable half of which are memecoins created primarily on the Solana network. According to Deutscher, the ease of deploying these tokens on-chain contributes to the inflated number of tokens but highlights a deeper problem of market saturation and dilution.
“We now have 5.7 times more crypto tokens than we had during the peak of the bull run in 2021,” explains Deutscher. “This is the main reason why cryptocurrencies have struggled this year, despite Bitcoin reaching all-time highs.” He likens the excessive issuance of new coins to inflation, where “the more tokens are released, the greater the cumulative supply pressure in the market.”
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The analyst also sheds light on the dynamics of venture capital (VC) investments in the cryptocurrency space, noting that the largest quarter of VC funding peaked at $12 billion in Q1 2022, just as the market began to turn bearish. Deutscher criticizes the timing and strategy of venture capital firms, noting that although capital injections are necessary to develop projects, they often lead to market imbalance.
“Venture capital firms, like individual investors, are opportunistic. The timing of their investment is often aimed at maximizing returns rather than supporting sustainable growth of the venture, which contributes to periodic peaks and troughs in the market,” Deutscher explains. He goes on to discuss subsequent market impacts, Projects delay their launch in unfavorable conditions, only to flood the market when sentiment turns, exacerbating dilution.
The continuous introduction of new tokens not only strains market liquidity, but also affects investor confidence, especially among retail investors. “The skew towards private markets is one of the biggest and most damaging problems in the cryptocurrency space, especially compared to other markets like stocks and real estate,” Deutscher asserts.
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This environment creates a barrier to entry for new liquidity and leaves retail investors feeling marginalized, a feeling exacerbated by high-profile failures like LUNA and FTX. “If retail investors feel like they can't win, they won't play the game, which is why memes have dominated this year — they're the only definition where retail feels like they have a fighting chance,” Deutscher argues.
Looking to the future, Deutscher suggests several strategies to mitigate these problems. Exchanges can enforce better token allocation standards and prioritize larger community allocations. Additionally, adjusting the percentage of tokens unlocked at launch can help manage selling pressure more effectively.
“Even if insiders don't force change, the market will eventually do so,” Deutscher asserts. It is suggested that exchanges adopt strict criteria for listing new projects and be equally stringent about delisting those that fail to meet existing standards, thus preserving market integrity and liquidity.
In his concluding remarks, Miles Deutscher hopes that his ideas will promote better understanding and prompt a re-evaluation of current practices. “Dispersion is not the only issue, but it is certainly a major one – and something that needs to be discussed more openly to foster a healthier cryptocurrency ecosystem.”
At press time, Ethereum (ETH) was trading at $3,562.
Featured image from Shutterstock, chart from TradingView.com