Digital currency market facing prolonged slump
NEW YORK (Reuters) – 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 $6 billion, cryptocurrencies nosedived, wiping out about 85 percent of their total market value since hitting a peak of more than $800 billion in early 2018.
Bitcoin, the original cryptocurrency, has dropped more than 80 percent since hitting an all-time high of nearly $20,000 in December 2017.
A global regulatory crackdown led by the US 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 percent 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.
ZCash, a more than twoyear-old digital currency with strong privacy features, has 28.05 percent of its total supply issued so far, according to Messari data. That means its token holders could see the supply mushroom more than three-fold in the years ahead, which would pressure coin values unless outweighed by demand.
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 under water, analysts said.
“I think a lot of these tokens have been issued on the assumption of a very bullish crypto market on all fronts,” said Kyle Chapman, a partner at Boston-based COSIMO Ventures, a private equity and venture capital firm focused on early-stage technology companies.