The Economics of An Altcoin

Bit Ghosted
Sep 3 · 3 min read

Why have so many altcoins lost 90%+ of their total market-cap from their 2018 highs?

There are levels of complexity to this answer but at the very front is the simple macroeconomic idea of “Value Added”.

Value Added: Value added in an industry refers to the difference between the total revenue of an industry and the total cost of inputs — the sum of labor, materials, and services — purchased from other businesses within a reporting period.

Value Added (Investopedia) https://www.investopedia.com/terms/v/valueadded.asp)

So many altcoins are still operating under the survival principles of 2016–2017 of simply improving technology and bragging about these improvements via various social media outlets to attract users/investors/capital. With very little retail investment coming into altcoin markets, this model of operation no longer works. The capital that remains in alt markets is no longer from the average retail investor but the much more seasoned and experienced crypto community who have weathered the crypto ice age of 2018–2019. With these much more seasoned investors it takes much more than simply bragging about the “cool” technology you are building but answering the age old question of how will these investors earn a future return on their investment.

How does the economic principle of “Value Added” work within a blockchain economic model?

The majority of coins today operate under high inflationary economic models where during each block new coins are created. They are considered high inflationary models as the amount of coins created during each block far outpace the value being brought into the economic ecosystem during the same time measurement. This results in a consistent downward pressure on price.

To counteract this downward pressure value or capital needs to be brought back into the ecosystem to form an equilibrium. During the high-flying markets of late 2017 and 2018 none of these concepts had to be taken into consideration as capital was pouring into almost all ecosystems via the over abundance of retail investors. Now with the average retail investor all but gone, a shift in thinking is required for any altcoin project wishing to survive. We must start abiding by classical economic principles to bring a healthy balance and level of consistency back into alt markets.

How can an altcoin bring value back into their ecosystem?

This will be a hard question for any development team to answer but first the utility of the coin needs to be looked at. If the coin has a utility and can be used to solve something to improve lives, economic models can be modified to bring in value. A perfect example of this being implemented (planned implementation) is with The Ether-1 Project (https://ether1.org). A major utility for the coin is that it can be used to pay for decentralized website/content hosting on their node network (see ethofs — ethofs.com). The concept of added value comes in where a user can pay for decentralized storage and the fees generated for this resource usage are poured back into the ecosystem via a revenue sharing protocol among node owners. In short, node owners (https://nodes.ether1.org) provide resources to the network and are rewarded with a share of generated revenue. The “Value Added” concept of revenue sharing is the piece that matters. If node owners were only rewarded via the coins generated during each block there would only be value leaving the system (miner rewards & node rewards) and this is what we have seem among almost all altcoin projects in existence resulting in the 90%+ market cap losses. Value needs to enter the system via a utility of some kind otherwise a high inflationary economic model will doom these projects to continue bleeding off value.

What does this mean for alt markets as a whole?

The next year or two is going to make or break many micro and low cap projects and without making adjustments to start bringing value into the system most will likely fade off as their teams stop building. I encourage any altcoin community to question their projects direction and hold their development teams accountable by asking this important question; how do you plan on bringing value back into our ecosystem?

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