Original author: ROUTE 2 FI
Original source: substack
原文标题：Reflexivity -what happens when too many altcoins and token unlocks hit the market going forward?
Compiled by: TechFlow
The total market capitalization of altcoins is growing steadily as new tokens continue to enter the market.
I think when BTC.D trends down and the altcoin rally comes, there will be a handful of altcoins that will surge. Not every altcoin that people are used to will surge.
Reflexivity: What happens when too many altcoins and token unlocks keep flooding the market?
Let’s talk about altcoins, how they have been launched recently, and the impact they have on the market.
During this cycle, there has been a trend to launch tokens with high FDV, large airdrops, low float, and later huge unlocks from VCs.
Crypto assets are reflexive. What does this mean?
This post was inspired by Twitter, Telegram chats, conversations with crypto friends, etc. It’s a post I’ve wanted to write for a long time. Special thanks to Cobie, Thor Hartvigsen, Thiccy, Andrew Kang, and Regan Bozman for their thoughts on this. Follow them on Twitter.
Reflexivity: The great idea of feedback loops
Originally proposed by George Soros, reflexivity is a theory that positive feedback loops between expectations and economic fundamentals can cause price trends to deviate significantly and persistently from equilibrium prices. Bitcoin has always been characterized by strong reflexivity. Bitcoin's positive cycles can last for a long time, however, Bitcoin's negative cycles are notorious for their length and depth.
According to Cryptonary, it is important to remember that when analyzing markets and how they move and function, the concept of market reflexivity goes against conventional wisdom. In theory, markets are always searching for equilibrium and all participants are rational people who base their decisions on facts. Bubbles, capitulation events, and boom and bust cycles are anomalies of market volatility; prices will eventually return to equilibrium. Prices have no influence on the factors that establish equilibrium.
On the other hand, in market reflexivity, everyone makes judgments based on their interpretation of reality, and prices have an impact on market fundamentals. You can see where this is going: if pricing affects fundamentals, then changes in prices must also affect fundamentals, which in turn affect investor expectations, which in turn affect prices as investors act on these revised expectations. Because herd behavior reinforces price changes, prices move further and further away from reality and eventually become the new reality - a self-fulfilling prophecy, if you will.
Prices should tend toward equilibrium, but because of the reflexive nature of markets, they often move above or below that equilibrium for extended periods of time. Prices will only begin to reverse their current trend when market participants realize that their view of the market is no longer based on reality, which usually happens long after prices have moved above or below reasonable levels.
That, my friends, is why we have this graph:
You see, reflexivity works both ways. Of course, a ball thrown into the air will eventually fall back to the ground.
If the price of Bitcoin increases significantly in a short period of time, it is likely that the price will increase for a period of time after the initial move. The reverse is also true. The cryptocurrency market is still in its infancy, so large price fluctuations are more likely to occur.
Take a look at the diagram above. This perfectly describes reflexivity. I think you have a good understanding of the concept by now, so let's move on.
Now, let’s look at altcoins and what will happen to the market in the future with all these new tokens launching into the market.
New tokens are great (until circulating supply increases)
I’ve written about the issue of supply and demand in cryptocurrencies before, but let’s repeat it again.
Market Cap: Circulating Supply × Price
Fully Diluted Valuation (FDV): All tokens (including unissued) × Price
It’s important to understand the VC/angel investing game (especially from a retail investor’s perspective).
Most cryptocurrency companies raise money from investors through SAFTs (Simple Agreement for Future Tokens). In the stock market, SAFTs are comparable to Simple Agreement for Future Equity (SAFEs), which allow investors in a startup to convert their cash investment into equity at some point in the future, provided that certain conditions are met.
To illustrate what a typical SAFT transaction might look like, let’s do a very simple example.
Token Name: Yolo Coin
FDV: $100 million
Unlocking conditions: 10% at TGE, then 1 year cliff, then 3 years linear unlocking
Circulating supply at TGE: 12% (part of which was airdropped)
Yolo Coin was launched after a lot of hype, and the FDV is now $1 billion (10x that of seed investors). Investors are happy because they can sell at breakeven and they still have 90% of the allocated tokens which will be gradually unlocked over the next 36 months (after a 1 year cliff period).
But wait? Why is the VC lockup period so long? The short answer is to ensure long-term consistency in case it is sold off at the TGE.
Let's look at why this is problematic:
Since investors are locked up for so long, this means that when they finally start to unlock, there will be constant selling pressure on the market.
Take a look at the picture below.
Assume the price of Yolo Coin is $1 (investor price = $0.10). 12% of the supply enters the market at launch, but we know that as tokens are unlocked, more and more supply will enter the market.
This leads to an increase in supply.
But the question is: where is the demand? Who will buy the tokens that VCs are dumping on you?
You can argue that the price will go up due to factors X, Y, and Z, e.g. an increase in TVL in DeFi protocols, a bullish event, etc., and this may work for a while. But at some point, supply will outstrip demand and we will start a downward spiral due to a massive increase in inflation.
Early buyers will be trapped, which leads to pessimism in the community, reduction in TVL of the protocol/protocol, developers (if any) leaving for better opportunities, team members leaving, etc.
Thor Hartvigsen summed it up well: “The market will not be able to absorb all the extra liquidity + people who received airdrops seem to want to cash them out rather than hope to receive more airdrops in the future”.
The biggest change so far this cycle has been the fragmentation in the space. We were taught to think that altcoins would all rise together. But right now there are about 300 decent projects with insufficient liquidity.
We often hear about the alt season, but this time I think things will be different. We are used to hearing that every coin will skyrocket under the right conditions. But is this true?
Keep in mind that there are far more “utility” tokens on the market today than there will be in 2021. There are now 3-5 “quality” tokens joining the market every week. Total market cap increases and everyone seems happy. But ask yourself, who is going to buy all these tokens. Unless institutions or retail investors enter in large numbers, it will just be an eternal PvP competition.
An example of this was the Wormhole airdrop two weeks ago. Launched with a $10 billion valuation. Now ask yourself why you would want to own it. I don’t see any other reason than pure speculation. Since launch the price has dropped 40% giving it a FDV of $6 billion.
As Cobie said: "Market capitalization is a measure of demand, while FDV is a measure of supply".
This means that the market capitalization is the total value of public demand, and it increases and decreases with the movement of prices. If the price rises, the FDV will also increase, but it also increases when the tokens are unlocked.
Let’s look at Pendle. Everyone loves Pendle right now because their TVL has increased dramatically due to the massive growth in point mining and Eigenlayer narrative.
Also note that 950,000 tokens out of 2.58 million are circulating in the market today (37%). As the price goes up, the market cap will go up. However, an increase in market cap does not mean there is additional demand for those locked tokens. To explain why, think about it from an investor's perspective. I know people participated in Pendle at less than 10 cents. Now the price is over $6. Do you really think the unlocked token holders care if the price is $6 or $7? No, so they will sell. Same thing: supply increased, but demand remained the same. (I haven't checked Pendle's unlock schedule, and I don't know how much FDV people invested. Just making some assumptions to explain supply and demand).
Are tokens with high FDV scary? Not always, a good example is $TIA in November 2023. $TIA currently has a FDV of $12 billion, but since the locked tokens will not be listed until the fall of 2024, the situation is not that bad, other traders may be scared by the high FDV.
For more on this, see Cobie's article.
OK, but back to the demand question. Where are the buyers?
As I mentioned in the introduction, new “quality” projects are launched every week with very high FDVs. This means a lot of supply is entering the market, and unless new buyers come in, these tokens have to fall (at least in the long run).
Retail investors like to invest in meme coins and SOL shitcoins. They don’t buy high-tech VC tokens. They learned their lesson from the 2021 rally. They are smarter today. Permissionless token listings and greedy VCs are bad for individual tokens long term. 100s of new tokens are launched every year. This dilutes existing tokens.
Now in April 2024, inflows into altcoins appear to be more selective, but not enough to offset the massive unlocking.
Is there a solution?
We’ve learned that the low float token model is bad. But can we fix it?
Obviously a big part of the problem is the number of projects being launched. Not everyone can buy into all of them. But a more linear unlocking schedule might be wise (as opposed to Arbitrum), as well as retroactive airdrops: think of Ethena and EtherFi, which are doing 2 rounds of airdrops. Maybe a re-ICO would help, which would create more loyal fans.
I think when BTC.D trends down, there will be a few altcoins that will surge. Not every altcoin that people are used to will do so. There are more crypto players at this time than in the last cycle, but people are smarter now.
According to Thiccy, $250M+ in altcoin supply is unlocked daily from new coins and all the coins on the market, most of these coins are not sold when people airdrop or invest in rounds because the market just goes up (“why sell today when you can make more tomorrow” mentality) due to upward reflexivity (positive feedback loop). That’s why we saw a massive sell-off in April, the market just needed a reason (war).
OK, so token unlocks, new listings, and staking rewards for existing tokens have resulted in an increase in altcoin supply of $250 million per day so far in 2024. Due to the large number of new coins launched, FDV growth has outpaced circulating supply, with a year-round increase of about 70%. The gap between FDV and circulating supply, which represents the amount of future supply that will enter the market, has increased by over $150 billion so far this year. As capital flows into majors slow, the weight of daily altcoin supply has become more and more apparent. The more I learned about trading, the more I realized that tactically shorting crypto altcoins can actually be beneficial. At least when you are trading in pairs.
Regardless, the total altcoin market cap is steadily growing as a result of the constant launch of new tokens and new supply entering the market.
There are some high market cap/FDV coins in the examples above. Look at Worldcoin: $1 billion market cap, but $64 billion FDV. What does that mean?
This means that Worldcoin will continuously supply tokens to the market in the future. In July 2024, they will start releasing them like crazy, with 6 million $WLD tokens entering the market every day. Today, there are only 181 million $WLD tokens on the market.
Using basic supply and demand curves, it is easy to see how it will be very difficult to maintain the $WLD price when these supplies enter the market.
Who will buy 6 million $WLD tokens every day?
What does this mean for the bull market?
As long as BTC/ETH is going up, this may not have much of an impact. We will see this happen in bearish conditions.
However, I like Anteater's approach, which is to be bullish on strong coins and bearish on weak coins. This is a hedging strategy, not a triangular arbitrage like Ethena. It may sound strange to hedge in a bull market, but on the way to the top of the bull market, there will be several downtrends. The process of reaching the top is not smooth.
Also, there have been a few posts on crypto twitter lately saying that this cycle is already 70% over. Who knows, so decide based on your risk tolerance.
I think most of the new VC scam coins (high FDV coins) will eventually sell off significantly. You can use this to hedge your position or use it if you want to hedge.
Examples of weak coins could be $STRK, $APE, $BOME, $ADA, $CRV, and $XRP. Or if altcoins are outperforming overall, combine these weak altcoins with strong altcoins: Currently strong: $ENA, $TON, $FTM, $PENDLE. However, this is not a recommendation to buy/sell these coins as market momentum can change quickly.
The good thing about memes is that they are actually one of the few honest coins. Look at $WIF, $PEPE, $DOGE, $POPCAT, etc. The circulating and total supply are the same. No one is dumping your coins on a crazy unlocking schedule. It's just pure PVP play.
Finally, let’s hear some words from crypto trader Wazz:
I think his argument is rational and makes a lot of sense. There are too many altcoins, too many projects, too many unlocked tokens that will enter the market in the future.
If the price of Bitcoin rises significantly in a short period of time, it is almost certain that the price will rise for some time after the initial rise. The reverse is also true. The low liquidity of the crypto market means that the price can easily move up or down significantly.
