Narrow Boom: The Mismatch of Token Supply and Demand in the Current Cycle

Currently, the major sectors seem to be farther apart than usual from the broader market, particularly Bitcoin. Although it has increased approximately 130% during the past year, the anticipated “All-in-Rally” that many had expected hasn’t materialized yet.

In many areas like Solana, artificial intelligence, and meme-based cryptocurrencies, we’ve noticed some exceptional performance. However, the broader crypto market as a whole has generally fallen short compared to these successes.

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Dispersion has been the tale of the tape this cycle — and it may very well continue.

All markets are simply a function of supply and demand. Crypto markets have grown considerably over the last several years, but so too has the aggregate supply of new tokens, and the crypto market is currently suffering from a substantial supply-side imbalance.

Currently, we’re witnessing an unprecedented increase in the release of new digital tokens, marking the swiftest expansion the market has experienced so far. The emergence of DIY token launch platforms such as pump.fun has ignited a wave of new tokens entering the market, with many of them being meme-based cryptocurrencies.

Concurrently, there’s been an increasing trend of token releases from significant protocols and decentralized applications (dApps), as the maturity dates for investments made by venture capitalists (VCs) approach. These private investments typically anticipate a return, and in the crypto world, this return often manifests as the sale of tokens when liquidity is needed.

Over the past year, there’s been a significant jump – approximately 50% – in the count of cryptocurrencies valued at $1 billion. With more tokens having high valuations, it necessitates a larger amount of capital to sustain their market prices.

However, thus far, the demand hasn’t caught up at the same rate. To illustrate, trading volumes on significant platforms are still below the peak levels of the previous cycle.

In contrast to the previous cycle, this time around we’re seeing a significant slowdown in the expansion of crypto lending and credit, which played a key role in driving the intense market activity seen in 2021. The markets for crypto loans reached their height during 2021-2022, amidst an environment characterized by low interest rates and an insatiable demand for risky investments. To provide some context, Genesis’ loan portfolio hit its maximum in Q1 2022 at approximately $15 billion, marking a 62% increase year-over-year (with total loan originations peaking at $50 billion the quarter before).

Despite the fact that the fall of major institutional lenders like BlockFi, Celsius, Voyager, Genesis slowed down speculative demand they had previously fostered, there are signs of recovery emerging, such as the introduction of new players like Coinbase’s institutional financing business. However, this sector is still not as vibrant as it was a few years ago. Furthermore, with today’s higher interest rates, there is less motivation to move funds onto the blockchain and into a volatile market, given that one can earn 5% on cash or stablecoin holdings by simply waiting.

With the powerful Federal Reserve reducing interest rates, as widely anticipated, we predict that investor confidence and credit conditions will strengthen. This is because the advantage of investing capital on the blockchain becomes more appealing due to the improved risk-reward ratio. Lower interest rates may also stimulate growth in the overall market cap of stablecoins, serving as a reliable indicator of increasing demand as on-chain activity escalates.

This might stimulate the demand in the cryptocurrency market that it’s currently lacking. However, it’s uncertain if this will be the catalyst leading to the “Everything Bull Market” as anticipated by some.

Note: The views expressed in this column are those of the author and do not necessarily reflect those of CoinDesk, Inc. or its owners and affiliates.