Is Too Many Cryptocurrencies a Risk for the Industry?

Variety Induced Inflation

Every other day it seems that some journalist thinks that some new token is going to change the game in the cryptospace. However, even in spite of my own enthusiasm for some of these projects, there are limits to the potential that cryptocurrencies as a whole have.

By adding more cryptocurrencies to the market, would-be cryptocurrency holders are spoiled for choice. However, having so many options that are expanding on a daily basis is spreading capital in the cryptospace too thin. By spreading capital out away from a single token (such as Bitcoin), investors may not be organizing as efficiently as possible. Token value increases with mass scale adoption, as we’ve seen from booms in the past. This could be made more efficient by organizing together to increase the value of a single currency that all holders benefit from.

A Brief History of American Banking and Counterfeiting

Cryptocurrency is not the first time a “wild west” of token creation has happened. A similar phenomenon occurred in the United States between the 18th and 19th centuries, while the country was developing its banking system. During the war for independence, congress issued notes that collapsed in value when the war ended. To work against this, congress passed an amendment to the constitution to forbid states from issuing independent lines of credit, and only gold and silver backed notes could be issued as currency, for better or for worse.

As time would go on, the US government would pass more and more laws to inhibit the growth of counterfeiters and increase the value of centrally issued currency. Bitcoiners don’t have access to a state apparatus to enforce halts on clone development, however the lessons the US government learned from fighting counterfeits still apply. Each new cryptocurrency effectively works as a counterfeit to Bitcoin and reduces its value. Just like counterfeit dollars reduce the value of USD.

It’s easy to not recognize this pattern, since for the most part, cryptocurrencies are all private and require voluntary opt-in. This is unlike government-backed currencies most people are accustomed to dealing with wherein dollars are required by law to pay taxes. It’s unfair to outright accuse all other cryptocurrencies of being counterfeit Bitcoin, since most of them aren’t exact copies of Bitcoin. But they are producing the same effect of counterfeiting and this is an important note to keep in mind. The key takeaway here is that new cryptocurrencies are adding inflation into the system, the same way counterfeit dollars did in the past.

Attack of the Clones

As developers set their eyes on the increasingly valuable cryptocurrency environment, more and more clones of things that already exist are appearing. Pancakeswap is simply a clone of Uniswap, but put on the Binance system rather than Ethereum. While one can point out their various measures of financial success, by offering tokens of their own they are adding inflation to the entire cryptocurrency system. Another similar case is between Maker and Venus and their respective tokens, DAI and VAI. The only difference between these two being, that Maker is on Ethereum while Venus is on Binance. It would seem that these clones are competing to determine which blockchain will win out in a kind of market Darwinism.

With inflation being added to the cryptocurrency system, it may continue to resemble the infamous Dotcom bubble. Eventually, enough investments will fail to sort of “filter out” the ideas that are simply clones of better versions that already exist (such as Bitcoin) or succeed by improving upon the original. In general, much of this “hyper-tokenization” that expands everyday with “revolutionary” new blockchains are capitalizing on the speculation and ignorance of newcomers.

On the horizon, we can see that Cardano and Crypto.org are releasing their own DeFi ecosystems. These may produce even more clones and add to the inflation within the cryptocurrency market as a whole. These new DeFi ecosystems will also be putting their dog in the market Darwinist competition for best DeFi ecosystem. As these organizations add inflation into the cryptocurrency market, I wouldn’t be surprised to see regulators turn their eyes towards them.

Controlling Inflation

Historically, inflation doesn’t seem to ever last; it’s always eventually brought under control. This comes in a variety of ways, including but not limited to adoption of gold standards, fixed exchange rates, or government intervention.

We’ve already seen the EU and China take measures to control the growth and development of cryptocurrencies in their jurisdictions. In the United States, Binance is currently under investigation by the Department of Justice and depending on how that goes, Binance-based DeFi could be facing investor losses or worse.

A Revert to Trusted Cryptocurrencies

Bitcoin however, being owned by no central authority, seems impervious to many kinds of intervention. Bitcoin’s ledger is entirely open and offers the kind of transparency that investors and regulating governments need to maintain confidence in the currency. As altcoins fail or are taken out by regulators, crypto holders should be seeking to store their value in trusted sources like Bitcoin and stablecoins. Bitcoin’s been around long enough and has produced enough data to identify trends and put faith in its market, even as cryptocurrencies gain more institutional traction. The altcoin clones that claim to have “revolutionary” ideas and technology will stop being valuable as education about cryptocurrencies spreads across the population.

It’s a chaotic time to be a cryptocurrency holder during this time of transition from underground movement to mainstream money generator. This has regulators on the edge of their seats, but diamond hands and smart investments will see you through this period of intense market Darwinism.