The altcoin market is facing significant challenges due to several key factors. Constant dilution of token supply, selling pressure from venture funds, lack of fresh inflows, and seasonal trends have all contributed to the sharp decline in altcoin prices.
Healthy Consolidation or Brutal Correction?
While Bitcoin (BTC) and Ethereum (ETH) have only dipped 15% from their yearly highs, many smaller cryptocurrencies have suffered much more. For example, Solana (SOL) and Avalanche (AVAX) are down 40% to 50% from their March peaks. Even worse, layer-1 challengers like Sui (SUI) and Aptos (APT) have dropped 60% to 70%.
High Dilution of Altcoins
One significant issue for altcoins is the constantly diluting supply of tokens. This dilution occurs through scheduled unlocks and distributions planned for years ahead. Most tokens are initially locked up, purchased by early investors, or designated for ecosystem development and grants. For instance, Arbitrum’s (ARB) token has approached its all-time low price despite a rise in market capitalization due to a massive increase in supply. Similarly, Solana’s supply inflates by 75,000 tokens daily, adding roughly $10 million in value at current prices.
Venture Funds and Selling Pressure
Venture capital funds are also a major source of selling pressure. These funds often cash out early investments in projects, especially in a bear market. Markus Thielen of 10x Research highlighted that venture capital funds invested $13 billion in Q1 2022 but are now pressured to return capital to investors as AI gains popularity.
Lack of Fresh Inflows
Another critical issue is the lack of new liquidity inflows into crypto markets. The market value of stablecoins, typically used for crypto trading, has stagnated since April. Stablecoin balances on exchanges, which represent available capital for trading, have decreased by $4 billion, the lowest level since February. This lack of demand exacerbates the problem for tokens with large upcoming unlocks and new token or airdrop programs.
Seasonal Trends and Market Sentiment
Seasonal trends have also been unfavorable for smaller tokens. Historically, June has been a down month for altcoins, with aggregated market cap data excluding BTC and ETH showing a decline each June over the past six years. This trend continues, with a 11% drop so far this month.
