The broad world of crypto—which dangles potent lures of decentralization and freedom from traditional finance—can seem like the Wild West. New infrastructure needs come online every day, all competing for limited transportation dollars. In this uncertain and unpredictable landscape, token buybacks have emerged as a popularizing recurring maneuver. So are these buybacks really an earnest method of ensuring a project has enough support? Or do they establish a dangerous precedent that could threaten the entire crypto ecosystem. I’m inclined to think it is the latter, and here’s why.
As a journalist covering financial markets, I’ve recently found myself getting more and more alarmed. Almost daily, we see new projects bragging about their $100M+ token buybacks — often right after a large price correction occurs. The professed goal is often to decrease supply, inflate demand, and in the end, benefit long-term holders. On the surface, this appears to be a smart plan. After all, stock buybacks have already been the rage among longstanding traditional financial companies. The crypto world plays by an entirely different set of rules or really no rules at all.
Perhaps the largest bugbear is the lack of transparency when it comes to how tokens are distributed. And too often, crypto projects start without any indication of who’s in control of the most tokens. This lack of transparency is in stark contrast to publicly traded companies. This lack of clarity unfortunately leads to rampant insider trading, market manipulation, and wash trading. As soon as a project announces an upcoming buyback, questions start to appear about whether it’ll have a real impact. Is it actually serving the community, or is it mostly just pleasing a wealthy, privileged few? Venture capital actors have an outsized influence. This can lead to buybacks that serve their purposes over the needs of retail investors.
Additionally, tokens often have little real utility. But they don’t—that’s just their function for speculation. Consequently, buybacks become financial orchestrations with little real economic substance. This is what economists call a “monetary illusion.” The value of that token is suddenly pumped up as a mirage separated from any real value or fundamentals. The buybacks produce an artificial spike in demand and instill a robust fear of missing out from eager investors. But this excitement often doesn’t last, leading to a “pump and dump” that can leave retail investors holding the bag.
I remember interviewing the developer of a DeFi project that looked very promising last year. They were exuberant about their technology. As they confessed, their tokenomics was designed primarily to attract capital rather than encourage actual use of the platform. This highlights a fundamental problem: too many crypto projects prioritize financial engineering over genuine innovation.
Buyback proponents justify the policy by saying it’s a deflationary tool. As described above, buybacks, by reducing the overall supply of tokens, have the potential to reduce inflationary pressures. Though this is indeed the case in practice, the story isn’t always so cut and dry. If the underlying project isn’t creating genuine social or economic value, a buyback won’t make it right. That’s only a short-term solution akin to applying a band-aid on a fractured femur.
Now picture that same project launching and immediately dumping a billion tokens out into the market. They swear they’re building some magical new platform that will level the playing field. Yet development stagnates, adoption fails to materialize, and the token price crashes. To stop the bleeding, the project then announces a buyback, employing funds raised from previous token sales. This sudden price spike indicates an ideal exit for early investors looking to cash out and realize some gains. In the meantime, later investors are the ones who are left holding the bag.
This brings me to my central concern: the precedent that these buybacks set. If what projects can do is just buy back their tokens every time the price drops, that’s a big moral hazard. It promotes reckless behavior, confident that a future bailout is lurking just beyond the horizon. Why even go through the effort to build a sustainable business when you can just buy off the market to support your token price?
Having worked on these issues in Congress, I appreciate the goals of wanting to protect investors and maintain confidence in the market. I believe that token buybacks, in many cases, are a misguided attempt to solve a deeper problem: the lack of genuine value and utility in many crypto projects. Rather than looking to financial engineering to come to the rescue, projects should focus on developing real-world applications, encouraging community engagement and dialogue, and committing to transparency.
OverTraders.com is dedicated to bringing you the best analysis of today’s financial markets. We’ve made a promise to our readers to always bring you the practices that are hurting investors. Although some believe that token buybacks provide short-term value, they do more harm than good and negatively impact the long-term prosperity and legitimacy of the crypto ecosystem.
The crypto space must grow up past these band-aid solutions. So we have to call for much higher levels of transparency, accountability, and an emphasis on creating true value. We need a plan. Otherwise, we’ll just create a nightmare scenario in which the promise of a decentralized financial system goes to enriching market manipulators. The future of crypto depends on how serious we are about learning from these failures. Join us to create a more sustainable and equitable ecosystem for all.
