The bane of crypto today is quantity rather than quality

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Scrolling through the pages of a well-known financial magazine, a peculiarity that I had never noticed caught my eye: almost all other advertisements were related to luxury watches. With so many watchmakers, what sets one brand apart from another in a saturated market, and how do companies keep their products unique, rare and valuable?

You could say it’s all about brand heritage, loyalty, design, rarity of collections, celebrity ambassadors and partnerships with sports franchises, fashion shows and the arts. Yet the real value lies in the skill of the watchmakers, the materials, the quality of manufacture and the attention of collectors, investors and gift buyers.

Scarcity is subjective, and the perception of scarcity fuels a strong demand for high-end watches, allowing them to cross the line between luxury consumption and a self-contained store of value. Scarcity promotes trust, and trust brings loyalty.

The same concept also applies to cryptocurrencies, where tokenomics shapes the rarity and value of a coin. Today, issues of token supply and demand, as well as burning or not burning, are often overlooked at the macro level. This problem needs to be addressed as cryptocurrencies lose a sense of scarcity and scarcity, undermining the foundations of price stability, utility, and crypto adoption.

Rarity Value, Altered

Understanding the crypto market in numbers is relatively easy: 420 million crypto investors worldwide (and growing), 225 recognized centralized exchanges (CEX), and over 26,000 different currencies in circulation. The combined market capitalization is US$1.18 trillion, roughly the GDP of Indonesia, whose top 10 cryptocurrencies account for US$1 trillion. This degree of market concentration is also an indicator of the disparity of public services.

This disconnect from utilities is largely ignored by those discussing the future of the industry. Even in the world of Web3, where crypto is used as a means of payment, the growing use by companies and countries of digital and real-world economies cannot hide the fact that thousands of altcoins will never reach critical mass. . Regardless of how fast crypto adoption grows, these tokens have limited or no utility and, respectively, no value.

The abundance of different coins in circulation hurts the scarcity value and discourages investors from considering the industry. I am not opposed to new currencies entering the market; on the contrary, they should be welcome. What needs to change, however, is the attitude of investors and stakeholders: it is no longer permissible to embrace every ICO simply for its existence. The quality bar for utility and tokenomics needs to be raised significantly, just as it has been with stock listings.

Rethinking tokenomics

The question of tokenomics revolves around factors such as maximum supply, presence and logic behind minting or deflation protocols, circulating supply and the impact of all of these on the discovery and volatility of price. This goes beyond typical collectibles markets, where there is a direct correlation between rarity, demand and increase in value.

At the level of individual projects, this can be illustrated by a huge variation in the maximum number of parts to be mined. Compare Solana, which has a supply of 551 million and Bitcoins famous small cap of 21 million BTC. Obviously, Bitcoin is relatively more valuable, but even Solanas’ total supply is fading in contrast to XRP’s 100 billion. More so, Ethereum minting is theoretically unlimited, although the circulating supply of 120 million limits which has hardly changed over time limits the prospect of an exponential increase. In turn, USDT’s supply of 85.7 billion is curiously small, given its widespread use as a basis for transactions, but its cash equivalent holdings of 84.7% limit its potential expansion.

Yet the disparity in total supply does not translate into a disparity in price and utility, but rather into a conscious choice of a particular niche in the digital economy. Cardano (ADA, with a maximum supply of 45 billion) and XRP are expected to see increased adoption for transactional purposes due to their convenience in pricing and exchange operations. It’s similar to how companies split their shares on the stock exchange to make them more accessible to individual investors.

On the contrary, the limited supplies of ETH, SOL and BTC open the door to further appreciation of growth-driving capital, making them more attractive from a long-term investment perspective rather than day-to-day use. transactions. All of these projects know their niche, audience, and growth drivers and structure their tokenomics accordingly, which many underperforming currencies fail to take into account.

tools for change

In an era of unconventional monetary policy, market polarization and financial instability, confidence in money has changed. Around the world, people are worried about depreciation, quantitative easing and tightening cycles, bank risk exposure and high supply-side inflation. Ordinary people bear all the risks not only economic but also political and the desire for uncorrelated assets and the returns they can offer is stronger than ever.

That said, how do you avoid a similar situation in crypto and restore balance without threatening decentralization? Arguably, it seems an industry-wide compromise is needed to reduce oversupply and increase token quality. For centralized exchanges, it would be easier to delist projects that didn’t perform well and pay more attention to the plans of those that remain. For individual projects, consideration should be given to increased burn, decreased hit rates, and meltdowns.

Failing to act and allowing the supply of new and existing tokens to grow in line with current forecasts effectively erases the barrier between crypto and fiat currency. There would be no reason to invest in ETH to USD volatility trades if both are easily downgraded.

Ultimately, cryptocurrencies lose their sense of scarcity, hurting their value proposition. And while currency value is not limited to scarcity but is defined by other factors including reputation, usefulness, adoption, notoriety, industry focus, origin, and technology, there are two scenarios where a change is possible.

The first is when confidence in economies (singularly, regionally or globally) due to sovereign indebtedness, external factors or financial stability is shaken. In this scenario, crypto is repositioning itself as a safe-haven alternative. The latter is the integration of cryptocurrencies and Web3 into the conventional economic system. The jury is still out on this, but what can be said for certain is that even 2,600 different cryptocurrencies or a small fraction of the current total is still far too many. A bonfire or a mega-merge seems necessary.

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