Are There Too Many Cryptocurrencies…Has The Asset Class Become Overcrowded?

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• Variety of tokens rise to the ten,000 degree
• Exponential crypto progress
• Hypothesis breeds new cryptos
• Lots of the smaller tokens will turn into mud collectors
• Stick to the highest tier currencies with sturdy liquidity

Earlier this month, Elon Musk threw a bearish curveball on the chief of the cryptocurrency asset class. At first of this yr, Tesla (NASDAQ:) bought $1.5 billion in and introduced it might settle for the digital foreign money as fee for its EVs. Tesla’s revolutionary electrical vehicles have been on the forefront of addressing local weather change by lowering reliance on fossil fuels.

Whereas Bitcoin and most of the different almost 10,000 cryptocurrencies are as revolutionary for finance as EVs are for journey, mining the tokens requires substantial quantities of power. Mr. Musk instantly determined that the power necessities for Bitcoin mining are a difficulty that runs opposite to his ethical compass.

He did an about-face and stopped accepting Bitcoin for Teslas. The value of the cryptocurrency plunged. After buying and selling above the $65,500 per token degree on Apr. 14, Bitcoin fell to the $30,000 degree on Might 19 after Musk’s announcement. Although it is recovered to some extent since then, buying and selling has remained risky throughout your entire digital foreign money asset class.

It is laborious to consider that the cryptocurrency asset class, with a market cap of over $1.7 trillion, now consists of nearly 10,000 tokens. The unimaginable beneficial properties in Bitcoin, , , and lots of others, sparked a speculative frenzy for these searching for the following coin that may make them a fortune.

Is the asset class turning into too crowded?

Variety of tokens rise to the ten,000 degree

It looks as if simply yesterday that the variety of cryptocurrencies floating round in our on-line world broke by way of the 1,000 degree for the primary time. On Might 19, the quantity was approaching 10,000.

Cryptocurrency market participants

Source: CoinMarketCap

The unimaginable returns delivered by Bitcoin, Ethereum, Dogecoin, and the opposite main cryptocurrencies which have seen their market caps swell into the billion greenback vary has inspired new tokens to return to the market every day. The ICO, or preliminary coin providing market has exploded, turning into a extremely worthwhile enterprise for these arranging token listings.

The sheer quantity within the ICO market has dwarfed the IPO enterprise within the inventory market over the previous years. Paradoxically, the Apr. 14 itemizing of Coinbase (NASDAQ:), the main cryptocurrency buying and selling platform, discovered its approach onto the through an untraditional route.

COIN rejected an IPO and all of the related guidelines, laws, and large charges. As an alternative, they went the direct itemizing route, whereby the NASDAQ listed the shares with out the assistance of a military of funding banks. The recognition of the asset class eradicated the necessity for investor roadshows and different bills conventional IPOs incur.

Exponential crypto progress

I keep in mind when the variety of tokens on the CoinMarketCap web site broke by way of the 1,000 degree, and it was not that way back. I started preserving observe of the rise on the finish of the primary quarter of 2019 when the determine stood at 2,136.

On the finish of 2019, it rose to 4,986, greater than doubling over the 9 month interval. On Dec. 31, 2020, there have been 8,153 cryptos. The worldwide pandemic probably slowed the exponential progress final yr.

As of the top of Q1 2021, 9,045 tokens had been in play, and on June 30, it’s a secure wager the quantity will eclipse the ten,000 degree. On Might 19, the quantity stood at 9,945 and rising.

Hypothesis breeds new cryptos

Speculators grease the wheels of markets as they add a constant degree of liquidity. As speculators purchase and promote property, they tighten bid-offer spreads due to their exercise.

Producers, shoppers, traders, arbitrageurs, merchants, certainly all market contributors profit from speculative shopping for and promoting. The speculator usually will get a nasty rap from the press, regulators, and legislators, however with out them, liquidity would undergo.

I all the time discover it fascinating when politicians complain that speculators are pushing the costs of property greater, inflicting shoppers to pay extra for merchandise. The reality is that speculators are as more likely to push costs decrease, however we not often hear complaints when costs are falling due to speculative participation.

In the meantime, Bitcoins rise from pennies to over $65,500 per token, and Ethereum’s explosive transfer from beneath $1 to over $4,400—in addition to many different crypto success tales inside the digital token asset class—have created a speculative frenzy. When my 88-year-old mom requested me if she should purchase Bitcoin, I knew the market was uncontrolled.

The rise of the asset class’s market cap has inspired the ICO market as an increasing addressable market of contributors who’re searching for the following digital coin that may flip a small funding into a major fortune.

Lots of the smaller tokens will turn into mud collectors

It is difficult to make a case for a continuation of exponential returns for 10,000 cryptocurrency tokens. In biology, “survival of the fittest” was an idea from Charles Darwin’s “On the Origin of Species,” printed in 1869.

Darwin recommended that organisms finest adjusted to their atmosphere are probably the most profitable at reproducing. For digital currencies, we’re more likely to see a monetary model of survival of the fittest over the approaching months and years.

The speculative frenzy that ignited the ICO market and pushed the addressable token market to the ten,000 degree is due for a considerable culling of the herd, to cut back numbers by removing undesirable traits from the asset class. The underside line is that when gravity lastly hits digital currencies in a major approach, lots of these 10,000 tokens will turn into nothing greater than pc mud collectors in digital wallets.

Nonetheless, digital currencies have made a few of the main monetary minds look silly over the previous years. JP Morgan’s CEO, Jamie Dimon, known as cryptocurrencies a “fraud” in 2017. At the moment, his financial institution presents its high-net-worth shoppers a cryptocurrency fund.

Famed investor and Berkshire Hathaway (NYSE:) CEO Warren Buffet mentioned Bitcoin was “monetary rat poison squared” across the identical time. Whereas he has been quiet on the subject over the previous months, his 97-year-old accomplice, Charlie Munger, lately doubled down, saying cryptocurrencies are “harmful for civilization.” My mother is simply 9 years youthful than Munger, however she stays scorching to trot on the prospects of massive earnings from the asset class.

Digital currencies are right here to remain. Nonetheless, the asset class must mature by addressing the various points that may improve the profile as mainstream property and technique of change. Custody, cybersecurity, and the carbon required for mining are all substantial points.

In the meantime, probably the most vital hole to bridge is the shift in monetary ideology that rejects authorities management of cash. Regulators and legislators will desperately search to carry onto energy, which comes from controlling and manipulating the financial system’s purse strings. Present financial and monetary insurance policies could also be fostering the rise of cryptocurrencies, however they’re instruments that governments should not more likely to give up.

We must always see the variety of cryptocurrencies peak over the approaching months. A big discount may come after a considerable correction in costs and the general asset class’s market cap, a little bit of which we witnessed in early Might.

Stick to the highest tier currencies with sturdy liquidity

In buying and selling and investing, liquidity is crucial. It permits market contributors to enter and exit danger positions. Shopping for or promoting an asset with restricted liquidity exposes one to a far greater danger degree.

Whereas I’ll throw a couple of bucks at a few of the smaller rising cryptos, these investments are a protracted shot that is not more likely to repay. I anticipate to lose each penny invested. Nonetheless, buying and selling is one other story. I comply with developments in markets as they mirror the herd mentality of a variety of market contributors.

I’d solely commerce cryptos with market caps over the $1 billion degree as of Might 18, which included beneath 100 cash. Aggressive buying and selling requires greater liquidity ranges. Due to this fact, my cut-off can be markets which are price over $10 billion. There are solely 17 cryptos or 0.17% of the asset class which have that crucial mass.

Assume biology when approaching the cryptocurrency asset class as there are too many tokens on the market in our on-line world. Most are sponges that may eat your investments with out the hope of any return. The fittest will survive because the market will ultimately cull the herd.