FIL on the rise: Filecoin’s upcoming production cut alters tokenomics

Filecoin’s sudden rise to the top 10 cryptocurrencies by market cap, however brief, points to its potential as it’s driven by community in China.

Filecoin (FIL) is one of the most prominent coins in the storage sector of cryptocurrencies. In the past month, the price and market capitalization of FIL has rocketed to new highs. On April 1, the coin reached $233.68 along with breaking into the top 10 cryptocurrencies by market capitalization. 

Basically, Filecoin is a decentralized cloud-based data storage network that allows its users to gain rewards on selling their excess storage on an open-source platform. Filecoin is made by Protocol Labs.

Although FIL’s stint in the top 10 list was short-lived, it’s important to note that Filecoin’s fully diluted market capitalization hit a high of $450 billion. This is nearly half of the hallowed $1-trillion mark that Bitcoin recently held for 10 days in a row.

In the last 30 days, Filecoin has posted unprecedented gains of around 440% from trading around the $42 mark to trading in the $184 range. Even though the price has dropped around 20% from its all-time high on April 1, the fact that it has settled at three times the price before the surge is itself an incredible feat.

On March 17, the FIL token got another push from the market. The benchmark for institutional interest in cryptocurrencies, Grayscale Investments announced new funds that would invest in five cryptocurrencies. These tokens are Chainlink’s LINK, Filecoin, Livepeer (LPT), Basic Attention Token (BAT) and Decentraland (MANA). As a result of this announcement, FIL’s price rose 40% in 48 hours, indicating that the community and the market at large reacted positively to this development.

Speaking about the reasons why Filecoin is garnering institutional interest, Marie Tatibouet, chief marketing officer of Gate.io — a cryptocurrency exchange — said: “Data is the most valuable commodity today, and there is a race going on to figure out cheaper and more efficient methods of storing data.” Martin Gaspar, research analyst at CrossTower — a digital assets exchange — told Cointelegraph of how much of an impact this announcement really had on the markets:

“As of April 5, 2021, the Filecoin trust only had $8.1 million of assets, according to Grayscale. This is a very small amount relative to the recent $1+ billion of 24-hour trading volume CoinGecko shows, suggesting there are other key drivers behind the increase in price.”

Cameron Winklevoss, co-founder of the Gemini Exchange, pointed out that he wasn’t surprised that the token’s price was “rocketing.” He cited the core propositions that the Filecoin project brings like “the amount of network storage power” as the main drivers for the rise. Tatibouet further opined on this, saying: “Bitwise 10 Crypto Index Fund and Grayscale have both added FIL, while The9 Limited and New Universal have both made multi-million-dollar investments in Filecoin mining.”

However, there are many different factors at play here.

China’s market plays a deciding role for Filecoin

A crypto journalist from China, Wu Blockchain, noted on Twitter that on the day FIL reached its all-time high, it saw large volumes coming from China’s largest trading exchange, Huobi, with 24-hour trading volume reaching $24.2 billion. This volume was nearly three times that of Ether (ETH) and Bitcoin (BTC) for the same day. Gaspar further mentioned:

“Filecoin is popular in China and has strong interest from Chinese miners, who are required to pledge the FIL token as collateral, resulting in demand for the token. Moreover, with a shortage of BTC and ETH mining rigs, Filecoin mining seems to be an attractive alternative for these miners.”

According to CoinGecko’s data, as of April 9, Huobi accounted for nearly 40% of Filecoin’s 24-hour trading volume. This data supports the notion that the interest in Filecoin is mainly driven by retail investors and miners based in China. The hype around this token in China is such that there are allegedly even posters in the subway advertising Filecoin.

This is similar to the phenomenon of Bitcoin’s posters being put up in Soho, London, except with the difference that Filecoin’s are obviously an advertisement to push retail investors to buy the token.

Robbie Liu, market analyst at OKEx Insights — the research team at cryptocurrency exchange OKEx — told Cointelegraph: “Filecoin’s market development in China is very strong, and Chinese miners make up more than 95% of Filecoin’s nodes.” With China being the world’s cryptocurrency mining hub, it is only natural that the market will be highly sensitive to mining economics. Tatibouet further stated that the reason for the high demand is that FIL mining “is a lot more affordable than Bitcoin and Ethereum mining.”

In August 2020, the Chinese government announced its new internet infrastructure plan that will be focusing on expanding innovations in 5G, artificial intelligence and the Internet of Things. This plan could potentially have an impact on Filecoin’s ecosystem, as decentralized cloud storage fits into the agenda.

There are also unconfirmed reports that officials in the Chinese government are quasi-officially encouraging Filecoin mining as a decentralized cloud storage solution fits in perfectly with China’s vision for homegrown internet infrastructure.

The future of Filecoin

Another reason for the growing demand for Filecoin is the production cut scheduled on April 15. On the changing supply and demand economics of FIL, Liu stated: “The spike in FIL prices is mainly a result of speculation ahead of the April 15 production cut. The protocol currently releases 648,000 FIL per day, but after April 15, the production will decrease to 365,000 FIL per day.”

Thus, post the mid-year release of Simple Agreement for Future Tokens on April 15, the daily production of FIL will be reduced by 43.2%. At the time of writing, FIL has a circulating supply of 65.33 million tokens, with the maximum supply capped at 2 billion coins. Thus, such a drastic decrease in daily production could lead to a perception of scarcity for the token, in turn, causing retail investors and miners to buy more of the coin to weather the upcoming planned decrease in FIL’s daily influx.

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Another interesting feature of FIL’s tokenomics is that it has a built-in mechanism, wherein miners must buy more FIL tokens in order to mine more of the cryptocurrency, which also acts as a utility and governance token for the Filecoin ecosystem. This mechanism prevents FIL from getting dumped in the open market by incentivizing the holders of the token by offering them more mining power.

The nature of Filecoin’s product offering puts it in direct competition with tech giants like Google, Amazon Web Services and Alibaba’s offerings. As Filecoin is a blockchain-based open network, the data store is non-tamperable, and the amount of storage it has access to is theoretically limitless.

Yet it is important to note that services from Amazon, Google and other tech giants are well-established and have been catering to retail and institutional needs since the beginning of cloud storage and computing being offered as a service. Liu believes that it is too early to say if Filecoin can compete with the giants, adding:

“While prospects remain positive, institutional-grade solutions rely on much more than just storage space. There is a need for operational management and tech support to fully host their services on cloud.”

Gaspar also explained the factors that Filecoin’s team would need to consider before really beginning to compete with the industry leaders in this space: “Filecoin will need to ensure its network remains online, files are securely stored and accessible and that the risks and costs of storing data on it are lower than that of a centralized storage solution.”

Although, how the FIL tokens demand sustains beyond the scheduled production cut remains to be seen, it is clear that due to Filecoin’s real-world use cases, the rise in price and market capitalization corresponds with a period of growth for the project and its offerings to compete in a market lead by companies with practically unlimited resources at their behest.