Cryptocurrencies
may be facing a prolonged bear market .
Companies that issued tokens , or digital currencies , over the last two years through initial coin offerings ( ICOs ) may have to sell more of these assets to finance their operations. There’s just one problem: There are very few takers.
After the blockbuster success of ICOs in 2017 , with funds raised at more than USD$6 billion , cryptocurrencies nosedived, wiping out about 85% of their total market value since hitting a peak of more than USD$800 billion in early 2018 .
Bitcoin
, the original cryptocurrency , has dropped more than 80 percent since hitting an all-time high of nearly USD$20,000 in December 2017 .
A global regulatory crackdown led by the U.S. Securities and Exchange Commission has created fear about greater oversight and acceptance of the currencies for payments among the companies issuing the tokens and the investors that bought them, taking the wind out of the once red-hot digital assets. Data from Dead Coins , which tracks crypto startups , showed that around 1,000 of these companies either failed in the last year or their projects have now been abandoned.
For digital currencies still in the market, the prospect of incoming supply—some with a predetermined schedule—could pose a challenge to their businesses given the current downturn in the market.
“Many people don’t fully understand the impact of new supply on this market particularly when there’s low liquidity,” said Ryan Selkis , co-founder of Messari , a crypto data platform in New York. “I don’t think anyone has any idea how much-hidden inflation there is in the form of token reserves that are going to be unwound gradually.”
Data from Messari showed that 71 coins of the more than 400 tokens on its database have issued less than 50% of their targeted total supply , which means there is a flood of these assets that could be sold to the market or distributed in some shape or form.
The supply pressure is not just coming from companies that need to sell tokens to finance their operations, but also from early investors in ICOs who were given investment contracts that give them the right to future tokens. The terms of those contracts are at the discretion of the company raising the funds, or the issuer of the token.
Those tokens have liquidity provisions that allow investors to sell them, but have found it difficult to do so because the coins are now underwater, analysts said.
Although a cap on the total number of anyone token was designed as a measure to help preserve value, that has not prevented a supply glut as demand has plunged .
The total number of bitcoins that could ever be created, for instance, is around 21 million , of which around 17.5 million , or 83%, have already been minted .
By contrast, the governments and central banks that control so-called fiat currencies like the U.S. dollar can issue more at will , diminishing their value over time.
Some digital currency issuers have tried to minimize the impact of price declines by undertaking measures to reduce token supply , with varying degrees of success.
Other companies have resorted to burning their own tokens and removing them from circulation , similar to share buybacks. By cutting the number of tokens, companies hope to make the currencies that remain in circulation rarer and more valuable.
In token burning, miners and developers typically purchase coins from investors and then send them to specialized addresses that have unobtainable private keys. Without access to a private key, no one can use these tokens, putting them outside the circulating supply .
The problem with token burning , however, is that companies need funds to buy back the tokens from investors before they can burn them. But many of these startups do not have the cash to burn their tokens because of the decline in the value of their own coins.
It has become a vicious cycle, analysts said. Companies need their investors to use their tokens to grow their platform and network, but their currencies have become pure speculative investments .
However, by removing their tokens from circulation, the startups limit the growth of their products, which rely on the use of these digital assets .
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