Token dilution is a value killer

The crypto market shows disappointing resilience. Behind the stable total capitalization is a far more disturbing reality: the value of tokens is eroding as their number explodes. This imbalance, pointed out by several industry figures, calls into question the very ability of tokens to capture the value they purport to represent. Between massive dilution and diminishing returns, the industry faces a structural flaw that could permanently redefine how it operates.

The supply explosion lowers the value

As the crypto market stagnates in extreme fear, Michael Ippolito, co-founder of Blockworks, warns of a major imbalance between token creation and value creation. This drift is summarized by a clear formula: “The average value of cryptocurrencies is barely higher than in 2020 (!) and has fallen by about 50% since 2021”. It also insists on a central phenomenon: “We have created a lot of new assets, but the overall market cap remains stable”.

A few notable observations specifically reflect this dynamic:

• The average token value has stagnated since 2020;
• A decline of about 50% from 2021;
• Mean returns declining about 80% from peaks;
• Total capitalization that does not increase despite the multiplication of assets.

These elements reflect the progressive dilution of value associated with an increasingly abundant supply that does not meet equivalent demand.

A break in the token model and a shift in capital

Beyond the simple issue of supply, another phenomenon worries observers: the growing disconnect between project fundamentals and the price of their tokens. While on-chain revenues are rising again, valuations are no longer following this trend.

For Ippolito, this signal is critical: “Token Issue Poses Existential Threat to Industry”. This breakdown suggests that tokens are no longer fulfilling their original role of capturing value, calling into question their economic utility.

This analysis is shared by Arthur Cheong, founder of DeFiance Capital, who talks about “an urgent need to fix the current state of tokens in the crypto industry”. He warns of the risk of market concentration around a few dominant assets, such as Bitcoin and Ether, at the expense of the rest of the ecosystem.

At the same time, data from DWF Labs confirms an important trend: more than 80% of projects are trading below launch cost, with a typical decline of 50% to 70% in just three months. This phenomenon is partly explained by the constant sales pressure related to airdrops and the unlocking of tokens for early investors.

In the face of this dynamic, some capital is diverted to publicly traded crypto companies, which are considered more transparent and potentially less exposed to this dilution. This gradual flow could mean a permanent market transformation where value is no longer primarily captured through tokens. The industry thus finds itself at a tipping point, forced to rethink its mechanisms of value creation and distribution in order to maintain its long-term credibility.

Luc Jose A.

A graduate of Sciences Po Toulouse and holder of the blockchain consultant certification issued by Alyra, I joined the Cointribune adventure in 2019. Convinced of the potential of blockchain to transform many sectors of the economy, I committed myself to raising awareness and informing the general public about this ever-evolving ecosystem. My goal is to enable everyone to better understand blockchain and take advantage of the opportunities it offers. I strive every day to provide an objective analysis of current events, decipher market trends, convey the latest technological innovations, and put into perspective the economic and social issues of this ongoing revolution.

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The views, thoughts and opinions expressed in this article are solely those of the author and should not be construed as investment advice. Before making any investment decision, do your own research.