Since its inception in 2009, Bitcoin has been positioned in academic literature as a potential store of value and hedge against fiat currency inflation. Its fundamental proposition rests on a permanently fixed supply cap of 21 million units, contrasting sharply with traditional currencies subject to monetary expansion by central banks (Nakamoto, 2008; Szabo, 2005). This digital scarcity was designed to replicate gold's properties in the digital realm, establishing Bitcoin as "digital gold" and a long-term store of value.
However, beginning approximately in 2011, the cryptocurrency market has witnessed explosive growth in alternative cryptocurrencies (altcoins), tokens, and blockchain projects. As of 2025, the market encompasses over 17,000 registered cryptographic assets, raising a critical empirical question: Does the massive proliferation of altcoins disperse limited investment capital that would otherwise flow to Bitcoin, thereby weakening its short-term growth potential and market dominance?
This question is not merely academic—it strikes at the heart of Bitcoin's value proposition. If capital dilution is a permanent structural feature rather than a temporary cyclical phenomenon, Bitcoin's role as the premier cryptocurrency reserve asset may be fundamentally challenged, with profound implications for institutional adoption strategies, portfolio allocation models, and the broader evolution of the digital asset ecosystem.
In classical equity markets, dilution refers to the decline in per-share value resulting from the issuance of new shares, which dilutes the holdings of existing shareholders. We adapt this concept to cryptocurrency markets through our central hypothesis: the Capital Dilution Effect (CDE).
The CDE hypothesis posits five interconnected propositions:
This formulation draws parallels to supply saturation effects observed in equity markets. Research on "crypto stocks" demonstrates that rapid exhaustion of valuation premiums, funding channel collapse, and narrative breakdown can trigger price crashes and negative feedback loops (analogous to market crashes). In cryptocurrency markets, the continuous mass supply of new tokens replicates this structure, creating systematic pressure toward capital fragmentation.
This paper advances the thesis that free market mechanisms—rather than government intervention—represent the most efficient regulators of the Capital Dilution Effect in the long term. We argue that:
These mechanisms constitute sufficient regulatory forces to mitigate CDE without requiring government intervention, which could simultaneously suppress innovation and violate foundational principles of decentralization.
We propose that government's role should be limited to: (1) combating financial fraud and crime, (2) establishing clear taxation rules, and (3) public education—rather than intervening in token classification or restricting altcoin creation. This position aligns with classical liberal economic thought (Smith, Hayek, Friedman) emphasizing market-based solutions and minimal intervention in innovative sectors.