Why is the crypto market suffering from a severe supply imbalance?

Author: Kevin Kelly, CoinDesk; Translator: Tao Zhu, Golden Finance

The consensus in the past was that rising BTC prices would lead to a trickle-down wealth effect in ETH and eventually spread to the long tail of "altcoins" - a cute term often used to describe all other crypto assets besides the two "mainstreams". We saw this dynamic in the last cycle. When BTC and ETH rose, everything else rose too.

Right now, the mainstream currencies are more disconnected from the rest of the market (especially BTC) than ever before. Despite a rise of about 130% in the past 12 months, we have not seen the "full rebound" that many people expected.

We have seen a few outperforming tokens - Solana, AI, memecoins - but the majority of the cryptocurrency market has lagged far behind.

Dispersion is the focus of this cycle, and it is likely to continue to be so.

• For context, during the 2017 cycle, the total cryptocurrency market cap grew from ~$40 billion to nearly $740 billion (~18x). The market cap of “altcoins” grew from essentially zero to over $400 billion — with 90% of that growth occurring in the second half of 2017.

• During the 2020-2021 cycle, the total market grew from a ~$280 billion base to nearly $2.8 trillion (~10x), while the market cap of “altcoins” soared from ~$70 billion to $1 trillion (~15x).

• But during this cycle, the entire cryptocurrency market grew only 2x — and the market cap of “altcoins” grew even less. Even at the market’s peak in March 2024, total altcoin market cap will still be around $200 billion below the previous high in November 2021.

All markets are simply a function of supply and demand. The cryptocurrency market has grown tremendously over the past few years, but the total supply of new tokens has grown with it, and the cryptocurrency market is currently suffering from a severe supply imbalance.

Today, the supply of new tokens is growing at the fastest rate the market has ever seen. The rise of DIY token issuance platforms such as pump.fun has sparked a surge in new token issuance, most of which are memecoins.

At the same time, with the advent of the venture capital wave a few years ago, the number of token unlocks from large protocols and dApps began to flood the market. Private investment comes with the expectation of returns, and in cryptocurrencies, exit liquidity usually comes in the form of selling tokens.

At the same time, we saw a 50% year-on-year increase in the number of tokens with a market value of $1 billion. More tokens have higher valuations, which means more capital is needed to support their prices.

But so far, demand has not kept pace. For example, trading volumes on major exchanges have not yet returned to the highs of the previous cycle.

Another key difference compared to the previous cycle is the lackluster growth in crypto credit and lending, which fueled the buying frenzy we saw in 2021. The crypto lending market peaked in 2021-2022 against a backdrop of low interest rates and rising risk appetite. For context, Genesis’ loan book peaked in Q1 2022 at around $15 billion, up 62% year-over-year (total loan originations peaked at $50 billion in the previous quarter).

However, the collapse of many major institutional lenders (e.g., BlockFi, Celsius, Voyager, Genesis) has hampered the speculative demand driven by these lenders. While we have begun to see signs of recovery, with new entrants such as Coinbase’s institutional funding business, the space remains tepid compared to a few years ago. Additionally, today’s high interest rate environment also reduces the incentive to move funds into volatile markets, especially when the alternative is to earn a 5% return on cash or stablecoin holdings.

As the almighty Fed begins to cut rates—which the market unanimously expects—we expect risk sentiment and credit conditions to improve as the risk-reward for moving capital on-chain becomes more favorable. Lower rates could also reignite growth in the total stablecoin market cap, a good indicator of rising demand as on-chain activity picks up.

This could spark the much-needed demand in the cryptocurrency market right now. But whether it will be the spark for the "resurrection of all things" that many are looking forward to remains to be seen.