Skimming through the pages of a well-known financial magazine, a peculiarity I never noticed caught my attention: Almost every other advertisement was related to luxury watches. With so many watchmakers around, what distinguishes one brand from another in a saturated market, and how do companies keep their products unique, rare and valuable?
One might say it’s all about brand heritage, loyalty, design, collection rarity, celebrity ambassadors, and partnerships with sports franchises, fashion shows and the arts. Yet, the real value lies in the watchmaker’s skill, materials, build quality and attention from collectors, investors and gift shoppers.
Rarity is subjective, and the perception of rarity fuels a robust demand for high-end watches, allowing them to cross the border between luxury consumption and a standalone store of value. Scarcity fosters confidence, and confidence brings loyalty.
The same concept is applicable to cryptocurrencies, too, where tokenomics shape the rarity and value of a coin. Today, the questions of token supply and demand, as well as “to burn or not to burn,” are often forgotten at a macro level. This issue must be addressed because cryptocurrencies are losing a sense of rarity and scarcity, undermining the foundations of crypto price stability, utility and adoption.
Rarity value, impaired
It is relatively easy to grasp the crypto market in numbers: 420 million crypto investors globally (and rising), 225 recognized centralized exchanges (CEXs), and over 26,000 different currencies in circulation. The combined market cap is US$1.18 trillion — roughly the GDP of Indonesia — of which the 10 largest cryptocurrencies make up US$1 trillion. This degree of market concentration is also an indicator of utility disparity.
This utility disconnect is largely overlooked by those discussing the industry’s future. Even in the Web3 world, where crypto is used as a means of payment, the increasing use by businesses and countries in digital and real economies cannot disguise the fact that thousands of altcoins will never achieve critical mass. No matter how fast crypto adoption grows, these tokens have limited or no utility — and, respectively, no worth.
The abundance of different coins in circulation impairs rarity value and discourages investors from considering the industry. I’m not arguing against new currencies entering the market; on the contrary, they should be welcomed. What must change, though, is the attitude of investors and stakeholders: It is no longer permissible to embrace every ICO simply for the sake of its existence. The quality bar regarding utility and tokenomics must be raised significantly, much like it has had with listing equities.
The question of tokenomics revolves around factors such as the maximum supply, the presence and logic behind minting or deflation protocols, the circulating supply, and how all of these elements impact price discovery and volatility. This extends beyond the typical markets for collectibles, where there is a direct correlation between rarity, demand and the increase in value.
At the level of individual projects, it can be illustrated by a huge variance in the maximum number of coins to be mined. Compare Solana, which has a supply of 551 million — and Bitcoin’s famously small ceiling of 21 million BTC. Evidently, Bitcoin is relatively more valuable, but even Solana’s total supply fades in contrast to XRP’s 100 billion. Even more, the minting of Ethereum is theoretically unlimited, although the circulating supply of 120 million limits that has barely changed over time limits the prospect of an exponential increase. In its turn, USDT’s supply of 85.7 billion is curiously low, given its widespread use as a base for trades, yet its equivalent cash holdings of 84.7% restrain its potential expansion.
Yet, the disparity in total supply doesn’t translate into a disparity in price and utility — rather, it shows a cognizant choice of a particular niche in the digital economy. Cardano (ADA, with a maximum supply of 45 billion) and XRP are expected to experience increased adoption for transactional purposes due to their convenience in price setting and exchange operations. It’s similar to how companies split their shares in the stock market to make them more accessible to individual investors.
On the contrary, limited supplies of ETH, SOL and BTC open the door for another growth driver — capital appreciation — making them more attractive from the long-term investment perspective rather than everyday transaction use. All these projects know their niche, audience and growth drivers and structure their tokenomics accordingly — something that many less successful currencies fail to consider.
Tools for change
In an era of unconventional monetary policy, polarising markets and financial instability, trust in money is no longer the same. Across the globe, people are concerned about debasement, quantitative easing and tightening cycles, risk exposure from banks, and heavy supply-side inflation. Ordinary people are bearing all the risks — not only economic but also political — and the desire for uncorrelated assets and the returns they can offer is as strong now as ever before.
That said, how can a similar situation in crypto be avoided and balance be restored without threatening decentralization? Arguably, it seems that an industry-wide tradeoff is necessary to reduce excess supply and increase token quality. For centralized exchanges, it would be easiest to delist projects that haven’t performed well and pay closer attention to the plans of those that remain. For individual projects, consideration should be given to increased burn, decreased minting rates, and mergers.
Not taking action and allowing the supply of both new and existing tokens to grow in tandem with the current forecasts effectively erases the barrier between crypto and fiat currency. There would be no reason to invest in ETH over USD — volatility trading aside — if both are easily susceptible to debasement.
Ultimately, cryptocurrencies are losing their sense of rarity, harming their value proposition. And although the value of currencies is not limited to scarcity but is defined by other factors, including reputation, utility, adoption, awareness, sector focus, origination and technology, there are two scenarios where a change is possible.
The first is where trust in economies (singularly, regionally or globally) — owing to sovereign indebtedness, external factors or financial stability — is undermined. In that scenario, crypto repositions itself as a safe haven alternative. The latter is the integration of cryptocurrencies and Web3 into the conventional economic system. The jury is still out on that, but what can be said for sure is that even 2,600 different cryptocurrencies — or a small fraction of today’s total — are still far too many. A bonfire or mega-merge feels needed.