Are we setting the cryptocurrency market up for a total failure of value?

At the time of this writing, there are over 1150 different ERC20 Ethereum tokens on the market, with more being added each day. In total, there are more than 2200 different cryptocurrencies available on the market with a market cap of about $261 billion dollars. For reference, on the two major US stock exchanges, NYSE and NASDAQ, there are 6300 listings, with a combined market cap of around $30 trillion dollars.

In other words, there are roughly about 1/3 as many listing of crypto currencies as there are company listings on the two major US stock exchanges, but with a market cap of only less than a percent of the total US stock market cap.

If you are like me, then you would expect prices for crypto to go up – but even taking Bitcoin at its current price and tripling it so that it exceeds the $20,000 run, and even if we do the same for all other currencies, we still only end up at about 2.6 percent the value of the US stock market while at 1/3 the listings. This troubles me.

However, we should also take a few considerations in mind, before l layout what troubles me:

1. Crypto markets are new and not as established as world markets.
2. New currencies can be created at anytime with little to no regulation, unlike publicly traded companies.
3. Many cryptocurrencies are “in ecosystem” tokens with an assigned USD value, but no value outside those ecosystems.
4. Market Caps for coins and tokens are arbitrary to their creators.
5. Trading is easier and more accessible and trade volumes will be much higher than standard securities markets.

So, what is troubling me about all of this?  Outside the obvious knowledge of scam coins, fake ICOs, pump and dump coins, and general theft – I fear that we are going to see a “failure of value” in top coins.

What is a “failure of value”? I’ll define it like this – as new coins and tokens are created, money flows into these coins and tokens – however, creators and users know that unless you can accumulate and hold massive positions in these coins and tokens, their value is better placed in the more stable coins – Bitcoin, Dash, Litecoin, Ethereum, etc. So they will sell their holdings to transfer that value into more stable coins, thus propping up larger coin’s values and devaluing smaller coins. With no restrictions on trading or quality, I think we will see a massive increase of tokens and coins in the next few years that will suck value out of the general crypto ecosystem, and place it into consolidated holdings.

Essentially, the number of coins and tokens will increase faster than the value of the market and drag the general value of the market down, as holdings are consolidated into stable coins thus overvaluing them until they are sold for fiat and the market crashes, devaluing the market as a whole.

Think of it this way. You, me, and 2000 other people all found public companies. We perform an IPO and immediately invest all that money into Amazon instead of our own companies. Amazon’s stock will skyrocket, as our own company’s stock fails. Then, we all sell our positions in Amazon, and take the cash instead of investing it back into our own companies – causing a hyper-devaluation of the market and a general crash. Investors will loose trust in the market as a whole and be very resistant to investing again, potentially causing the market to be permanently crippled as money is placed elsewhere.

Call me paranoid, but I think a hyper-valuation and hyper-devaluation could happen again, very much like what happened to BTC on its run to $20,000.

As crypto grows, and the general public becomes more aware of its existence and potential for investment, I fear that its ability to replace or supplement fiat will be wasted on a total market failure. As long as it remains tied to fiat, then the potential for a sold destabilization will remain constantly present. Without solid regulations and regulated markets we run the risk of permanently destabilizing the crypto economy.

So what could be done to fix this? With the whole point of crypto being a decentralized currency with no central governing body, do we just simply run a constant risk of destroying the whole ecosystem? No, but I think there are a few things we could do:

1. Remove the pegging of stable coins to FIAT when considering its general valuation. Instead, peg them to each other to encourage inter coin trading while maintaining value in the market.
2. Divide trading platforms into three categories by market cap (large, medium, small), and allow coins and tokens with market caps of less than $5 million to only be tradeable for other cryptocurrencies with a market value of less than $5 million.
3. Encourage the creation of ICO standards for trading platforms – basically standardize rules for ICOs and the application process for those coins to be listed, to ensure that we can avoid scams.

Obviously there is no easy answer here, and as long as the markets remain akin to the wild west, I think we’ll continue to run the risk of a total market failure, as soon as a larger portion of the general world public begins to invest. Do you agree? Do you think that a “failure of value” could happen? Should there be restrictions on trading and valuations?

Let me know your thoughts!

• KC