Zombie tokens

I’ve talked about the concept of Zombie tokens before, primarily in podcasts (my own and some guest appearances). The premise of the zombie token is that there are hundreds (or thousands) of tokens with far too little liquidity to even consider selling in significant quantity, and therefore they are dead despite carrying some value.

Bendik Norheim Schei has put together a nice post on Kryptografen on this topic as well. He speculates that while Bitcoin dominance charts at around 70% right now (a multi-year high), the true dominance is closer to 90% in his view.

The main reason is that one could easily create a cryptocurrency with 1 billion premined coins, and do one trade at say 3 dollar each. This would lead to a total market capitalization of $3 billion, which would represent 1% market dominance with today’s valuations and inflate the total market capitalization.

The problem is that the calculation does not take liquidity into account. One might be able to sell one token for 3 dollars, but what happens if you want to sell 1 million? Without accounting for liquidity, market capitalization becomes a meaningless measure.

Measuring liquidity is not straight forward, and ideally one would create some combined measure of slippage, how much the price moves when you execute a large order, and spread, the difference between bid and ask prices. Large slippage and a wide spread would indicate low liquidity, which is the case for many coins and tokens.

A simpler measure of liquidity, commonly used as a proxy, is trading volume. Using this to adjust the relative market capitalization, we get a more meaningful measure of the relative strength of the different coins and tokens.

He goes on to estimate the 90%+ dominance level. I think he’s absolutely right. It’s clear when you look at coins trading on various (even top) exchanges, the liquidity is trash, yet they carry market caps of tens or even hundreds of millions of dollars. Furthermore, there is a super long tail of tokens that aren’t on top exchanges and have basically no volume, yet still carry a market cap. That long tail adds up and cuts into bitcoin’s dominance, while being pointless.

Many coins that carry huge supposed market caps have never even been distributed. A staggering number of ICOs, even big ones, haven’t released coins due to the bear market, and have continued to offer excuses in their investor updates as to why they haven’t released the tokens. The only reason is a simple one: if they did, the sell pressure would be immediate and extreme, and they are hoping to wait out the death of altcoin markets.

Does this mean alts are 100% dead?

No. If anything, the opportunity for some, keyword some, altcoins is very high — certainly relative to the opportunities over the last year. There are many projects with real working platforms and products, and a higher valued treasury than token market cap. Meaning they have more cash in hand than their token is worth. Find those projects. Keep an eye on them.

Many coin founders from the ICO era are long gone into new pastures. Be careful which ones you attach yourself to, if you choose to dive into the wild land of altcoins.

But some zombies will come back to life. This liquidity problem doesn’t have to stay that way. Volume comes and volume goes. There is little demand for alts today. As tides shift and opportunities shift, there will be a new day for alts. Liquidity will make its way to the tokens that deserve it — and some that don’t.

Working your way into highly illiquid coins can be a strategic advantage, but it comes with significant risk. If you want to exit while it’s still illiquid, you’re in trouble. But if you can wait it out, call a bottom with some reasonable success, then you can take advantage of the return of altcoin liquidity and use it to sell your positions over time, preferably for a profit.

But be careful, because every step of the way, every new resistance on the way back up is a location where some long time bagholder is breaking even, and may just end the party earlier than you hoped by dumping it all. Unfortunately, the biggest holders willing to dump like this are often the teams behind a token.

It’s a silly game. And keep the big picture in mind. You’re probably here to make make money and increase your bitcoin. Don’t be distracted from the mission. If alts help you do that, great. If they don’t, don’t get too attached.

None of this is should be take as financial advice. It is my opinion and commentary alone.