In a thread on X, crypto analyst Miles Deutscher speaks about what he sees as a critical flaw in the current altcoin market. According to Deutscher, the rapid increase in the number of crypto coins is a huge problem for the industry. So much so that, according to him, we have got to the heart of the misery.

The increase in crypto tokens

Since April 2024, the crypto landscape has seen the introduction of more than 1 million new tokens, a notable portion of which are memecoins created primarily on the Solana network.

Deutscher explains: “We now have 5.7 times more crypto tokens than we did at the peak of the 2021 bull market. This is a key reason why crypto is struggling this year, despite Bitcoin hitting new all-time highs.” He compares the excessive issuance of new tokens to inflation, where “the more tokens are launched, the greater the cumulative supply pressure on the market.”

The analyst also sheds light on the dynamics of venture capital (VC) investment in the crypto space, noting that the largest quarter for VC funding peaked at $12 billion in Q1 2022, just as the market started to turn bearish.

“VCs, like private investors, are opportunists. Their investment timing is often focused on maximizing returns rather than supporting sustainable project growth, which contributes to cyclical peaks and troughs in the market,” Deutscher explains. He then discusses subsequent market impacts, where projects delay launches in adverse conditions, only to flood the market when sentiment shifts, exacerbating dilution.

The constant introduction of new tokens not only strains the liquidity of the market, but also erodes investor confidence, especially among retail investors. Deutscher emphasizes: “The skew towards private markets is one of the biggest and most damaging problems in crypto, especially compared to other markets such as equities and real estate.”

This environment creates a barrier to entry for new liquidity and leaves retail investors feeling left out, a sentiment exacerbated by high-profile failures such as LUNA and FTX. Deutscher states: “If retail investors feel like they can’t win, they won’t play the game, which is why memes have dominated this year – it’s the only meta where retail feels like they have a chance.”

Better standards and smarter tokenomics

Looking ahead, Deutscher proposes several strategies to mitigate these problems. Exchanges could maintain better token distribution standards and prioritize larger allocations to the community. Additionally, adjusting the percentage of tokens released at launch can help manage sales pressure more effectively.

“Even if insiders don’t make a change, the market eventually will,” Deutscher said. He suggests that exchanges should adopt stringent standards for listing new projects and be equally stringent in delisting projects that do not meet ongoing criteria, so as to maintain market integrity and liquidity.

In his closing remarks, Miles Deutscher hopes that his insights will lead to a better understanding and rethinking of current practices. “Fragmentation is not the only problem, but it is certainly a major one – and something that needs to be discussed more openly to promote a healthier crypto ecosystem.”

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