Poor Performance of Altcoins? Insufficient Liquidity and Fragmentation May Be to Blame
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Poor Performance of Altcoins? Insufficient Liquidity and Fragmentation May Be to Blame
A more friendly retail market benefits everyone.
Navigating Web3 tides with focused insightsAuthor: Miles Deutscher
Translation: TechFlow
The core structural flaws in cryptocurrency are now becoming apparent—and this is the primary reason why altcoins have underperformed in this cycle. There currently seems to be no solution, and after digging through all the data, what I found was shocking.
The purpose of this thread is to give you deeper insight into cryptocurrency’s biggest problem. It will precisely explain how we got here, why prices are behaving this way, and what the path forward might look like.
Let me take you back to 2021, when market sentiment was at a fever pitch. Fresh liquidity flooded in rapidly, driven largely by new retail investors. The bull run seemed unstoppable, and risk appetite peaked.
During this time, venture capital firms began deploying unprecedented amounts of capital into the space.
Founders and VCs, just like retail investors, are opportunists.
The increase in investment is capitalism’s natural response to market conditions.
For those unfamiliar with private markets: simply put, venture capital firms invest funds into projects at an early stage (typically 6 months to 2 years before launch), usually at low valuations (with vesting schedules). This funding helps finance development, and VCs often provide additional services or connections to help projects get off the ground.
Interestingly, Q1 2022 was the single largest quarter for VC funding in history ($12 billion). This marked the beginning of the "bear market"—yes, VCs perfectly timed the top.
But remember, VCs are just investors—the increase in deals stems from a surge in the number of projects being created.
Low barriers to entry, combined with crypto’s perceived high upside during bull markets, made Web3 a breeding ground for startups. New tokens emerged nonstop, causing the total number of crypto tokens to triple between 2021 and 2022.
But soon after, the party ended. A cascade of contagion—from LUNA to FTX—completely destroyed market confidence. So what did all these projects, which raised massive funding earlier that year, do?
They delayed, and delayed again. Launching a project in a bear market is essentially a death sentence—low liquidity, poor sentiment, and lack of interest mean many new launches were dead on arrival. So founders decided to wait for a reversal. It took time, but eventually—in Q4 2023—they got their chance. (Remember, the peak of VC funding was Q1 2022, 18 months prior.)
After months of postponement, they finally launched under better conditions—one after another.
It wasn’t just old projects deciding to launch. Many new players also saw the new bull conditions as an opportunity to start projects and make quick profits. As a result, 2024 has seen a record number of new product launches.
Here are some statistics that are simply staggering: since April, over 1 million new cryptocurrency tokens have been launched. (Half of them are meme coins built on the Solana network.)
You could argue these numbers are inflated due to the ease of deploying meme coins on-chain. That’s true—but it’s still a crazy number.
For a more accurate picture, see the chart below from CoinGecko, which excludes many smaller meme coins.
We now have 5.7 times more cryptocurrency tokens than at the peak of the 2021 bull market.
This is a major issue—and one of the main reasons why crypto has struggled this year, despite $BTC reaching new all-time highs.
Why?
Because the more tokens released, the greater the cumulative supply pressure in the market—and this supply pressure is compounding year after year.
Many 2021 projects are still unlocking, and supply pressure keeps stacking up each subsequent year (2022, 2023, 2024).
Current estimates suggest around $150–200 million in new supply hits the market every day. This persistent selling pressure has a massive impact on prices.
Think of token dilution as inflation. When governments print dollars, it reduces the dollar’s purchasing power relative to goods and services.
It’s the same in crypto. When you issue more tokens, you reduce their purchasing power relative to other currencies like the dollar.
Altcoin dilution is essentially crypto’s version of inflation. It’s not just about the sheer number of tokens issued—many new projects’ low FDV/high circulation models are also a big problem.
Because this leads to a) extreme dilution and b) continuous supply pressure.
All this new issuance and supply would be manageable if sufficient new liquidity entered the market. In 2021, hundreds of new projects launched daily, and everything went up. But that’s not the case now. So we find ourselves in this situation:
A) Not enough new liquidity is entering the market;
B) Massive dilution and sell pressure from unlocks.
Now that you understand the problem, let’s discuss potential solutions.
How can things improve? First, I must emphasize the need for more liquidity in crypto.
There are relatively too many VCs. The imbalance between private and public markets is one of the biggest—and most damaging—issues in crypto, especially compared to traditional markets like equities or real estate. This imbalance becomes problematic because retail investors feel they can’t win. And if they feel they can’t win, they won’t participate.
Why do you think meme coins have dominated this year? It’s the only way retail feels they have a fighting chance.
Since price discovery for many high-FDV tokens happens in private markets, retail doesn’t get the 10x, 20x, or 50x returns that VCs enjoy.
In 2021, you could buy a launchpad token and get 100x. This cycle, tokens launch with $5B, $10B, even $20B+ market caps—with no room for public price discovery.
Then they start unlocking, and prices keep falling. I don’t have a silver bullet solution. It’s a complex issue involving many stakeholders who could change behavior.
Still, here are a few ideas:
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Exchanges could implement better token distribution models
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Teams could prioritize community allocations and larger pools for real users
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Higher unlock percentages at launch (potentially with mechanisms like step-down sell taxes to prevent dumping)
Even if insiders don’t force change, the market eventually will. Markets always self-correct. Declining meta effectiveness and public backlash may shift dynamics in the future.
Ultimately, a more retail-friendly market benefits everyone—projects, VCs, exchanges, and ultimately more users.
Most current issues are symptoms of short-term thinking—and the fact that the industry is still in its early stages. Also, regarding exchanges, I’d like to see them become more pragmatic. One way to offset massive new listings and dilution is to delist ruthlessly. Let’s remove the 10,000 dead projects still soaking up precious liquidity.
The market needs to give retail a reason to come back—that alone would solve half the problem. Whether it’s a strong $BTC rally, $ETH ETF approvals, macro shifts, or a true killer app people actually want to use—there are still many potential catalysts.
I hope this clarifies recent developments for those confused by recent price action. Dilution isn’t the only issue, but it’s definitely a major one—and one worth discussing.
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Miles Deutscher
