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

While BTC and Ethereum have made strong comebacks in the last year, much of the rest of the market is still catching up, say Kevin Kelly and Jason Pagoulatos

This year has been a tale of two markets. On the one hand, BTC and ETH have staged a remarkable comeback, rallying 130% and 100%, respectively, over the last 12 months. But while the majors have been making new highs, much of the rest of the market has yet to join the party.

aggregate crypto market cap rose by 50% year-over-year, largely driven by a wave of new tokens, particularly memecoins, being launched at an unprecedented rate

At the same time, we’ve seen a growing number of token unlocks from large protocols and dApps start to flood the market, as vesting dates come due from the wave of VC investments a couple years ago

Meanwhile, we’ve seen a 50% year-over-year increase in the number of $1 billion market cap coins. More tokens at higher valuations require more capital to support their prices

This narrow boom has been a key talking point among our team throughout the year. The consensus used to be that a rising BTC price resulted in a trickle-down wealth effect for ETH, and eventually would spillover into the long tail of “altcoins” – an endearing term commonly used to describe all the other crypto assets outside the Big Two “majors.” We saw this dynamic play out last cycle. When BTC and ETH were up, so was everything else.

This time around, the majors feel more disconnected than ever from the rest of the market, especially BTC. Despite its ~130% rise over the last 12 months, we haven’t seen the “Everything Rally” many were anticipating by now. Sure, there have been small pockets of outperformance – Solana, AI, memecoins – but a majority of the crypto market has largely underperformed.

So what gives? How can BTC and ETH be rallying so strongly, yet the rest of the market feels disconnected? To answer this question, we need to understand the tale of the tape this cycle: Dispersion.

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.

Let’s break down the key drivers of this imbalance:

The rise of DIY token launchpads (like pump.fun) has sparked a surge in new tokens being launched, most of them memecoins. For example, we saw 200 new tokens launch on BNB Chain in January alone

Another major difference compared to last cycle is the lackluster growth in crypto credit and lending, which helped fuel the buying frenzy we saw in 2021

Crypto lending markets peaked in 2021-2022 amidst a backdrop of low interest rates and insatiable risk appetite. For context, Genesis’ loan book peaked in Q1 2022 at ~$15B after surging 62% year-over-year (total loan originations peaked at $50B the quarter before).

However, the collapse of many key institutional lenders (e.g. BlockFi, Celsius, Voyager, Genesis) hampered the speculative demand these same lenders helped fuel

Though we’ve started to see signs of a recovery, with new entrants like Coinbase’s institutional financing business, this area remains tepid compared to just a few years ago. In addition, today’s higher rate environment offers less incentive to move money on-chain into a choppy market, especially when the alternative is getting paid 5% on your cash or stablecoin holdings to wait and see

As the almighty Fed starts to cut rates – the market unanimously expects this to begin in the second half of 2024 – we’d expect to see risk sentiment and credit conditions improve as the risk-reward of bringing capital on-chain turns more favorable. Lower rates can also reignite growth in total stablecoin market cap, which is a decent proxy for rising demand as on-chain activity picks up.

This could light a fire under demand that the crypto market desperately needs right now. Whether or not this will be the spark that ignites the “Everything Rally” many are hoping for though remains to be seen.