What are Supply Shocks in the Cryptocurrency Market на сайте Nedvio

The cryptocurrency market is prone to periodic shocks from sudden changes in token supply dynamics. Unlike fiat money supply, which central banks modulate, crypto supplies are programmatically defined. But certain events can alter expected supply trajectories, impacting prices. Analyzing the supply shocks that have occurred reveals their significance in cryptocurrency market cycles.

Pre-Mined Supply Flooding Markets

Many early cryptocurrency projects pre-mined substantial portions of the total token supply before public launch. These large blocks of insider-held tokens flooding markets often suppressed prices.

For example, Ripple distributed 80% of total XRP supply to company insiders, resulting in recurring selloffs even years later as founders liquidated holdings. These predictable inflows created overhang limiting upside price potential.

Post-Release Mining Rate Shifts

Some protocols have dynamically adjusted mining rates after launch to try stimulating certain network effects. Increased inflationary supplies can produce price-depressing effects.

For instance, Litecoin’s mining reward halving schedule accelerated after release, pushing new supply higher. Bitcoin Cash also increased its block rewards, contributing to downward price pressure on BCH.

Airdrops and Token Unlocks

Projects conducting airdrops and granting investors token unlocks increased token circulation rapidly. While enhancing project growth prospects, this sudden beneficiary distribution placed short-term selling pressure on prices at unlock events.

Compound’s airdrop and early backer unlocks significantly increased COMP token float. Despite the long-term bull case, COMP dropped 40% in the week following its largest unlock round.

Treasury Liquidity Mining Programs

Protocols launching treasury-funded liquidity mining programs can stimulate growth but also inject unpredictable new supplies if improperly structured.

For example, Synthetix distributed 1 billion SNX from its treasury as liquidity mining rewards. This surplus issuance suppressed SNX price as recipients predictably monetized rewards.

Protocol Changes Impacting Supply Issuance

Developer decisions to alter issuance rates, burns, or caps in response to market conditions also produce supply shock effects.

Increased stakes and slashing penalties on the Ethereum 2.0 beacon chain suppressed ETH supply issuance. This reduced potential selling by miners and likely supported prices during ETH’s bull run.

Burning Mechanisms Reducing Token Supply

Some protocols have introduced token burning mechanisms designed to decrease circulating supply over time. By permanently removing tokens from circulation, burning aims to counteract inflationary pressure and increase remaining token value.

For example, Binance Coin implemented a quarterly BNB token burn funded through exchange profits. This predictable supply reduction helped bolster BNB’s bull run during the 2020-21 crypto rally.

Ethereum also instituted a fee-burning model after its London upgrade in 2021. Over 1 million ETH has been burned so far, adding deflationary pressure likely contributing to Ethereum’s price appreciation.

While positive for prices long-term, the sudden introduction of burning mechanisms can produce short-term volatility spikes as markets react.

Technical Exploits Draining Reserves

Technical vulnerabilities in smart contracts have enabled exploits draining protocol treasuries. These abrupt supply losses often have pronounced price impacts.

In 2020, hacks drained Yam Finance of $750,000 worth of tokens and SushiSwap of $13 million. These instant treasury depletions severely compromised the projects and crashed their token prices over 95% following the exploits.

Technical failures have also resulted in coding errors accidentally burning major token supplies. Original ERC-20 versions of projects like BeautyChain and TraceDonate permanently burned tokens due to faulty code.

Macro Environment Shifts Impacting Monetary Premiums

Broader macro environment changes such as rising inflation or changing central bank policies can impact the relative scarcity premium conferred on cryptocurrencies.

For example, stimulus programs and rising inflation in 2020-2021 increased Bitcoin’s perceived value as a non-sovereign store of value. This inflow supported substantial price increases despite supply remaining stable.

Conversely, tightening monetary policy reducing liquidity tends to undermine premiums on crypto assets, pressuring prices lower even without changes in underlying token supplies.

Miner Capitulation and Supply Dynamics

In crypto bear markets, falling prices can make mining unprofitable, forcing miners to capitulate by selling reserves. This can create a spiral where miner capitulations add token supply to the market, further dragging prices down.

However, miner capitulations also decrease network hash rates, which then slows the pace of new supply issuance. This can eventually stabilize sell pressure.

These dynamics were evident during Bitcoin’s 2018 bear market, with huge hashing power declines eventually helping set the stage for the subsequent bull run by restricting new supply issuance.

Conclusion

Cryptocurrency supply schedules have programmed rules but remain subject to unanticipated shocks. Insider distributions, mining rate changes, airdrops, liquidity programs, and protocol alterations can all shift supply trajectories.

Carefully tracking these events provides insight into ensuing price impacts as new supplies absorb into markets. While enhancing adoption, ill-constructed supply increases often prove detrimental to short-term prices.