This article is a return article by Cobie, a well-known cryptocurrency influencer, on Substack (he hasn’t posted for 2 years). The article discusses hot issues in the new token issuance market, especially tokens with “low circulation and high fully diluted valuation (FDV)”. The article is divided into three parts, and this is the first part, which explores the market’s misunderstandings and problems with new token issuance.
key point
The new token issuance market suffers from problems of private capture and phantom pricing.
In 2021, market participants have failed to become more mature and instead continued to make the wrong choice of new tokens.
Today, price discovery for almost all assets is captured privately outside the market.
Although the ICO era also had its problems, it appears to be fairer compared to current market dynamics.
The Ethereum and Solana ICO and seed rounds showcased the dramatic disparity in returns between public and private markets.
Today, seed round valuations have increased significantly, and the team has captured more value.
The privatization of price discovery has led to huge differences between financial returns in public markets and returns in private markets.
The high FDV is partly due to the natural increase in market demand.
Low circulation is not a problem in itself, but it can become complicated when combined with other issues.
“Phantom markets” lead to distorted price discovery and unhealthy markets.
Readers should avoid buying high FDV tokens and express their protest by not participating.
Investment opportunities in new token issuances are almost all captured privately, and investors should be more cautious and patient.
Note 1:
"Private capture" in this context refers to the process whereby the price discovery of new tokens takes place almost entirely in the private market before they are traded on the public market. This means that the majority of an asset's price discovery and early gains are done through private investors, venture capital (VC), and early rounds of financing, rather than through the supply and demand dynamics of the public market. This private market price discovery often results in an artificially high initial valuation of a token, which results in the average investor having to purchase at a very high price when the token is officially listed for trading, greatly reducing their potential returns.
This “private capture” phenomenon makes new token issuance less attractive to the average investor, as most of the price growth and investment returns have already been captured by early private investors.
Note 2:
The term “illusion pricing” in this article refers to the process of price discovery in the private market before a new token is listed, which does not reflect the true market supply and demand relationship, but is artificially manipulated and pushed up by a small number of participants (such as project teams, early investors, and venture capital firms). This pricing process results in a serious overestimation of the initial valuation of tokens in the public market.
Specifically, the process of unreal pricing is as follows:
1. Private market transactions: Before the token is officially listed, the project will sell tokens at increasingly higher valuations through multiple rounds of private financing. These tokens are usually locked and cannot be traded immediately.
2. Artificially inflated valuations: Since these transactions are only conducted in the private market and token holders cannot sell immediately, there is no real supply and demand interaction in the market. This allows the price of tokens to be artificially inflated to an unreasonable level.
3. Market reaction after listing: When a token is listed on the open market, due to the previous high valuation, ordinary investors are faced with an already pushed-up price, which is often not sustainable for a long time, resulting in a possible sharp drop in the token price after the unlocking period.This phenomenon of “phantom pricing” means that the public offering price of new tokens cannot truly reflect market demand, causing ordinary investors to take higher risks when purchasing these tokens.
Note 3:
The "phantom market" in this article refers to the price discovery and transactions conducted in the private market before the new token is listed. These transactions do not reflect the real market supply and demand relationship, but are controlled and manipulated by a small number of participants (such as project teams, early investors and venture capital companies). This kind of market has the following characteristics:
1. Unilateral control: The supply in the phantom market is controlled by a few people (such as project owners or large investors), who decide when and at what price to sell tokens.
2. Lock-up period restrictions: Private investors who purchase tokens usually face a lock-up period, which means they cannot sell the tokens they hold for a certain period of time. This limits the liquidity of these tokens, further distorting the market price.
3. High valuation transactions: Since the supply is controlled, the price of the token can be gradually pushed up, and the valuation of each round of financing may be much higher than the previous round. These high valuations do not reflect the real market demand, but reflect the highest price that participants are willing to pay.
4. Market dislocation: When the token is finally listed on the public market, the high valuation created by this phantom market does not match the actual demand in the public market, resulting in token prices that may fluctuate significantly.For example, suppose a token is sold in a phantom market at multiple high valuation rounds, but these tokens are locked up and cannot be traded immediately. When the token is listed on the open market, ordinary investors see an artificially inflated price, but due to the lack of real market demand, this price is likely to fall quickly after the lock-up period ends.
This phantom market phenomenon makes the price discovery process of new tokens opaque, making it difficult for ordinary investors to assess the true value of tokens, increasing investment risks.
This post is the first in a three-part series focusing on the issues and misconceptions surrounding new tokens in the market that are often described as “low circulation, high FDV.”
Well, at least I think this will become a three-part series on Substack. There's a lot to discuss, and I'm known for talking about a lot. But maybe I'll get too lazy and not finish the whole series, and it'll end up being just two parts. We'll see.
Before we get started - if you don’t quite understand what I’m talking about in this post, a previous post I wrote in 2021 might help: Memes about Market Cap and Unlocked. 👇🏻
Editor's Note: Key points about an article the author mentioned in 2021:
Thoughts on market value and unlocking
key point
Market capitalization is the price of a crypto asset multiplied by the number of coins/tokens currently in circulation; FDV (fully diluted valuation) is the price multiplied by the total number of coins/tokens that will exist for that asset in the future.
The unlocked locked tokens can come from different categories such as team tokens and investor tokens, and the unlocking time can range from a few weeks to a few years.
FDV can be confusing because market capitalization represents public purchasing demand, while FDV represents supply.
Unlocking events affect the market because sellers of locked tokens may be willing to sell at a lower price.
Professional investors trade locked tokens at a discount through the over-the-counter (OTC) market, which can lead to a neutral or even bullish market reaction to the unlocking event.
Unlocking schedules and estimating the cost basis of locked token holders are important to understanding changes in market supply and demand.
Projects with high FDV will eventually be fully unlocked, so it is necessary to consider the impact of the timing and method of unlocking on the market.
Project owners and investors may use various mechanisms to maximize the fully diluted market value, thereby creating huge paper profits.
Note: Paper Profit: Paper profit usually refers to the profit calculated by a company or individual based on the market price, which can also be understood as potential, unrealized profit. It is calculated based on the current market price, not the actual profit.
As always, please remember: I am not a financial advisor, I am a human with biases and flaws, I have my own problems, I am a fool, my intelligence is past its prime and on the decline, I stumble through the world, trying to understand everything, but rarely succeeding. I am definitely part of the crypto industry, which means my IQ is not close to double digits. I try not to write too much about the coins I own, but I will reveal them gradually in the article. Did you guys hear that RoaringKitty is back and he released about fifty awesome Avengers videos? Well, anyway.
Notes to Editors:
RoaringKitty is an individual investor active in social media and investment. His real name is Keith Gill. RoaringKitty is active on social platforms such as Reddit under the username "DeepF***ingValue" (DFV for short), and is keen on discussing the stock market and value investment concepts in the investment community.
RoaringKitty attracted widespread attention for his investment in the gaming company GameStop (GME) during the hype event of Wall Street giant Mellon Bank in January 2021. He attracted a large number of investors to participate by sharing information about GameStop and short-term speculative funds on social media, causing drastic fluctuations in GameStop's stock price.
RoaringKitty has gained attention for his role and influence in the incident and has become a well-known retail investor and online investor. He advocates long-term value investment and is committed to promoting transparency and fairness in the investment market.
When I wrote that article three years ago, I thought that might be the last time I would write about float, FDV, and the market cap game. Perhaps a little naively, I expected market participants to become more sophisticated about these important dynamics.
However, they ultimately picked these new coins as the “best long-term coins,” citing “no unlocking within a year” as a good reason to buy, as well as other shiny new coin features, fresh charts, and focused attention.
To make matters worse — other market participants have become more sophisticated about these dynamics. Teams, exchanges, market disruptors, and financiers have adapted to these market mechanisms, often using them to significant advantage.
As a result, I feel that most new coin launches today are effectively uninvestable in the market — market participants’ understanding of the issues is extremely underdeveloped, and they spend their time blaming the symptoms of the problem.
In this multi-part series, I will explore some of the issues with the current coin market and discuss why I would recommend staying away from new token launches — unless you know what you are doing and are able to perform proper research and analysis.
Most of the advantages of the new token are now captured privately.
Today, almost the entire “price discovery” for an asset is done outside of the market, privately owned before the token is even created. And much of this price discovery is actually inflated due to private market dynamics.
It’s interesting to see that by 2024, people are eager for ICOs again. When you look at the difference in opportunities between now and then, it’s hard to disagree with them: in some ways, the ICO era seemed a lot fairer than the current market dynamics.
Back to the ICO Era: The Bad Side
What I want to emphasize here is that ICOs are also actually very bad in many ways. It’s easy to look back at successful ICOs, but there are hundreds of ICOs that simply raised tens of millions of dollars and then disappeared or slowly exited the market. (What I also overlooked is that ICOs are likely illegal in most major jurisdictions).
Retail investors wasted hundreds of millions of dollars funding rotten ideas that couldn’t survive, raised only because of the ICO craze.
Even successful products have left investors suffering. There have been many cases of successful companies whose tokens have been deemed “dead”, with investors holding zero tokens, the company receiving dilution protection, and then simply ignoring the token after a while.
(This even happened with Binance’s ICO — investors raised $15 million to build Binance, but received no return in Binance equity for it. Of course, I’m sure no one who bought into the Binance ICO is complaining, “Because BNB was priced at 15 cents per coin at the time, it was one of the best performing ICOs ever. So, yeah.)
ICOs: Benefits
Okay, ICOs are bad, we get it. But they can sometimes be good. And it’s actually pretty easy to show why they’re good.
Ethereum raised $16 million in their ICO, selling 83% of the supply (60 million ETH) at $0.31 at the time.
This gives the public token sale an effective valuation of around $26 million (mining and staking make things slightly more complicated, but this is a rough approximation).
At today’s prices, ETH ICO buyers received a ~10,000x return in USD terms (~70x in BTC terms).
If you missed the ETH ICO, the lowest price you could buy ETH on the market was $0.433 in October 2015, which was only about 1.5 times higher than the public sale price. At that time, Ethereum was valued at about $35 million.
While Ethereum’s $26 million valuation pricing is nearly impossible to find in crypto investing, even for the privileged seed rounds of the dumbest ideas you’ve ever heard of, the key point here is that price discovery and upside are open to all participants.
The price discovery from a $26 million valuation to a $350 billion valuation was done publicly and in a way that regular people could participate in. There was no KOL round, no unlocking and binding plans, and the returns driven by buying the cheapest market price ever were quite similar to buying an ICO.
Turning to private financing
After major global regulators regulated ICOs, crypto token issuers stopped raising funds from the public and turned to private financing from venture capital firms.
If you compare Solana’s first funding round in 2018 to Ethereum’s ICO, it’s a little interesting.
Solana raised about $3.2 million in the round, selling about 15% of its supply at $0.04 per SOL at the time. This equates to a valuation of about $20 million, similar to Ethereum’s ICO valuation.
Buyers in the SOL seed round received a ~4000x return in USD at today’s prices. (It may actually be slightly higher due to annualized staking rewards).
If you were unable to participate in the limited funding round, the cheapest price you could buy on the market was around $0.50 in May 2020 — about 12x higher than the seed round.
Buying at the cheapest market price ever brought a ~300x return. At the time, Solana was valued at ~$240M with less than 5% of total circulating supply. Solana actually only had ~10 months of low circulating supply — they gradually unlocked from almost no circulating supply until a huge unlock phase in January 2021.
The privileged position of investors in the first few rounds allowed them to effectively capture a 10x price increase ($0.04 → $0.5) on Solana privately.
(Solana has also done a few other privileged/private funding rounds around $0.20, and a CoinList “auction-style” limited public token sale, also around $0.20 as I recall.)
2021 Fever
Solana launched in 2020, essentially close to the lowest point in Bitcoin and Ethereum prices after the COVID-19 crash. Their massive unlocking coincided with a new wave of users on cryptocurrencies. The success of this model across various tokens and the “bullish unlocking” phenomenon drove a massive increase in private market valuations.
The initial sales price of Ethereum and SOL were both around $20 million. By 2021, seed rounds were highly competitive, with large venture capital firms often involved in bidding wars. Seed round prices reached hundreds of millions of dollars.
(I remember the first time a project pitched me a $100M seed round. I felt sick and turned it down. Later, the project launched at a 40x valuation and I missed it. After learning my lesson, I bought the next $100M seed round token that appeared in my portfolio. As a result, the project failed, has gone to zero and is no longer active).
While private market valuations are soaring, crypto traders are saying “FDV is just a joke” when it comes to liquid markets, while all charts are forming valid uptrends.
Axie Infinity was valued at ~$50B, even though only ~20% of tokens were in circulation at the time. FileCoin was valued at ~$475B, but had a market cap of $12B. The increase in supply of high FDV tokens was swept up by a flood of new entrants.
As total issued valuations reach larger amounts, VCs are increasingly willing to pay more for private rounds — “If this project is trading at $15 billion, then bidding on another project’s round for $300 million is acceptable, and missing out is a bigger risk!”.
The founders are of course willing to take these offers — they can raise more money and pay less tokens for it. In the past, they had to sell 10% of their shares at a 20 million valuation to raise $2 million. Now, they can sell 1% to raise $2 million, keeping the extra token supply for incentives, the community, or (…surprise!) themselves.
If a reputable VC funds a promising project at a $100M valuation, many less reputable VCs will try to emulate them. If a project's last round of financing was at $100M, these less theoretical chaser VCs will try to lead a new round at $300M-500M as soon as possible. The slightly worse entry price doesn't matter to them, these projects have already traded in the billions.
It was easy for founders to take these deals. It made their personal wealth “watermark” higher, without market forces, and added new members to their team to help their product win over the competition. Of course, most of these new members turned out to be net negatives in retrospect, but the founders didn’t know that at the time.
Over time, more value and price discovery is captured privately.
Private Capture
If we draw conclusions from the previous examples of Ethereum and Solana and consider a comparison with projects launched in recent years, I will choose two comparable projects: Optimism and Starknet.
Consider the following metrics: initial sale valuation, historical low valuation in the market, percentage of outstanding shares at the time, and market vs. private sales returns.
ETH ICO Valuation: $26 million
ETH's lowest valuation in history: $35 million USD FDV
Market Lowest Valuation Date: October 2015
Circulating shares at the time: 100% supply on the market - market cap $35 million.
Public sale return: 10,000 times
Market return: 7,500 times
SOL Seed Valuation: $20 million
SOL's lowest valuation in the market: $224 million FDV
Market Lowest Valuation Date: May 2020
Circulating shares at the time: 2% of supply on the market - market cap $4 million.
Private seed round return rate: 4000 times
Market return rate: 300 times
OP Seed Valuation: $60 million
OP's lowest valuation in the market: $1.7 billion FDV
Market Lowest Valuation Date: June 2022
Circulating shares at the time: 6% of supply on the market - market cap $95 million.
Seed round return rate: 183 times
Market return: 6 times
STRK Seed Valuation: $80 million
STRK's lowest valuation in history: $11 billion FDV
Market Low Valuation Date: Now
Circulating shares at the time: 7.5% of the supply on the market - Market capitalization $800 million
Seed round return rate: 138 times
Market return: None
If you look at these metrics, a few things are clear. First, seed valuations have increased dramatically over time.
Ethereum’s initial coin offering (ICO) raised around $26 million.
Solana's seed round of financing was approximately $20 million FDV.
Optimism's seed round of financing was approximately US$60 million FDV.
StarkNet's seed round of financing was approximately $80 million FDV.
Now, seed round financing for similar projects has reached more than $100 million FDV.
As the seed valuation rose, the team received multiple returns because they still owned the entire supply prior to round 1. If StarkNet were valued at the same level as Ethereum, initial investors would still receive a worse financial return because their initial entry price was 4x higher.
Frankly, I think this is pretty harmless in itself.
To me, it makes sense that as cryptocurrencies become more popular and the financial returns of Bitcoin and Ethereum have been proven over time, founders will have better options for fundraising. There is a huge demand for early stage cryptocurrency investments, so the price will naturally adjust.
But the most striking trend emerging from the above data is the huge divergence between financial returns in public markets and those in private markets.
Ethereum’s ICO returns were 1.5 times higher than what is available on the market.
Solana’s seed round returns were 10x higher than what was available in the market.
OP’s seed round returns are 30x higher than what is available in the market.
STRK's seed round return rate is infinite times what is obtainable in the market, because now is the lowest price STRK has ever been, which means that all public market buyers have lost money, but the seed round return rate is as high as 138 times.
As you can see, the rewards are increasingly being captured privately.
To visualize this, consider the private fundraising round for the token I mentioned earlier:
Ethereum had one ICO that sold 80% of its tokens and no other funding rounds.
Solana sold 15% of its tokens in its seed round and had several private funding rounds prior to the TGE, with a total value of approximately $80 million FDV.
OP's seed round was around $60 million, followed by a private placement round worth about $300 million and FDV of about $1.5 billion before TGE.
STRK’s seed round was $80 million FDV, and then before TGE there were financing rounds of approximately $240 million FDV, $1 billion FDV, and $8 billion FDV.
If you imagine a price chart of these assets, but also try to visualize private market prices on a chart (valuations on a logarithmic scale).
All of the charts start in roughly a similar valuation range ($20m-$80m), but increasingly this upward trend is dominated by private markets.
OP and STRK have similar market caps ($11 billion) right now, but OP would have to rise 6x on the public market to reach $11 billion. STRK has fallen 50% to get there.
In order to reach $11 billion, SOL would have to rise 50x on the public market and Ethereum would have to achieve a massive 450x public market return.
Crypto token investment opportunities that offer returns similar to the ETH ICO now occur frequently, but almost entirely in private.
High FDV is partly due to natural market demand
It is an unrealistic expectation to expect that the released FDV will be far off from the released FDV of 4 years ago.
The amount of capital in the space has increased 100x, the supply of stablecoins has increased 100x, the demand for new quality crypto tokens has increased 100x, etc. New tokens are launched at a higher price because the market demand is now much higher and the valuations of similar projects are much higher.
When looking at FDVs, consider whether they are priced appropriately for the rest of the market.
Solana’s initial all-in valuation is approximately $500 million.
At that time, this would put Solana among the top 25 cryptocurrencies.
It would have been worth a quarter of the valuation of BNB, which was one of the top ten cryptocurrencies at the time.
It was launched at a time when the price of Ethereum was $150 per ETH.
It was launched at a time when the Ethereum to Bitcoin ratio was 0.02.
I use the ETHBTC ratio here to show the market's confidence and demand for Ethereum and the smart contract chain proposition, which is at a historical low. There are even more doubts about "alternative L1s". There have been many failed attempts at "Ether killers".
Since then, ETH has risen 20 times, BTC has risen 10 times, SOL has risen 138 times, the entire market has risen sharply, and the confidence in smart contract chains as an alternative to Ethereum has reached an all-time high.
now:
The top 25 cryptocurrencies will have a market cap of more than $5 billion, about 10 times higher than when Solana launches.
A quarter of BNB’s valuation is now around $9 billion, about 20 times higher than when Solana launched.
The ETH price is $3,100, about 20 times higher than when Solana launched.
The ETHBTC ratio is 0.046, more than twice as high as when Solana launched.
If Solana launched today, using these comparable metrics as a proxy for demand, the fully valued at launch could be around $10B — and even this may be an underestimate as these comparable metrics do not take into account the popularity of “alternative L1s.”
Likewise, when Avalanche launched in September 2020:
Avalanche's full valuation at launch was approximately $2.2 billion.
At that time, it will be listed among the top 15 cryptocurrencies in existence.
It was valued at half of BNB’s valuation, which at the time was one of the top five cryptocurrencies.
It was launched when the Ethereum price was $350 per ETH.
It was launched when the ETHBTC ratio was around 0.03.
Recalculating the launch date to today, using modern prices, the Avalanche would have a launch price of $15 billion to $20 billion.
Post-crisis prices
Another way to look at this is to consider Solana’s low valuation in 2022, following the FTX crash and collapse of investor confidence.
Solana’s valuation, at its lowest price in a severely depressed market, is approximately $5 billion. This valuation represents one of the best liquid investment opportunities of the past few years, achieved only through the absolute expulsion of fraud and leverage from the market.
Since then, the market has rebounded significantly. If an Ethereum ICO were held today, it would raise more than $16 million. If a Solana seed round were held today, there would be billions of dollars in demand.
It’s great that you want to buy things at the prices they were 5-10 years ago, but that’s a bit like saying “I want to buy Ethereum at $150.” Yeah, who wouldn’t want that?
They are priced relative to the amount of risk taken, the amount of confidence in these assets and the cryptocurrency market as a whole, compared to previous rounds and prior published full valuations. The demand for those earlier funding rounds is significantly lower, so they are priced for that demand.
Even in late 2020, some of the projects I funded were struggling to fill their $2-3 million rounds, and now, “Pin the tail on the donkey — but on the blockchain”’s seed round is oversubscribed simply by the fact that it’s called “gamefi.”
Imagine this: if the founders of Solana launched a new blockchain tomorrow, at what valuation would you be willing to buy it? Would you pay at least a quarter of the current Solana valuation ($25 billion FDV)? Maybe even half of Solana’s valuation ($50 billion FDV)?
Of course, even at 10% of Solana's current valuation, the FDV would be very high because market demand would be very high. Yes, the FDV is higher now because the overall market value is much higher than before and demand has increased significantly.
Of course, a high FDV is not always an indicator of market demand for a particular asset. A high FDV is not always justified or fully reasonable.
Especially recently, this is generally not the case. Market participants have found ways to use these levers to their own advantage and set valuations at inflated levels.
One of the bigger problems in the market is not that FDV is higher on average - it's that the high FDV of many new projects is disconnected from asset reality and they are simply trying to fit into other high FDVs.
Launching at multi-billion dollar valuations has become the norm, even if such valuations cannot be justified by any real data, and projects that may never justify these valuations appear indistinguishable from better projects to many market participants.
Low float is not a separate problem
Low float is not a bad thing in and of itself, and low float does not in itself make the market unhealthy or represent bad actor status - it is just a variable that investors must consider. Many low float tokens have had good launches and healthy market dynamics.
Bitcoin’s issuance schedule is well known, with a halving every four years, reducing the supply of new coins on the market. Bitcoin’s “float” is <10% for a full year after the genesis block.
I believe that higher circulation is almost always healthier for a token, and I respect projects that try to reach 100% circulation quickly (there doesn’t seem to be a good way to get more circulation into the market, and the projects that succeed in doing so are often working against their own best interests in the short term).
I am merely suggesting that low float in itself is not an obvious "red flag" if your evaluation of other important factors shows favorable results. Similarly, higher float does not immediately indicate safety or a "better investment."
Where the low-volume dynamic gets tricky is when it’s paired with other issues: unreasonable and exaggerated FDV, unusual agreements with other market participants, or manipulation from bad actors.
Low-flow markets are easily manipulated and distorted by bad actors - for example, the lower the flow, the easier it is to pin a high valuation on a token via lower USD demand.
Yes, low float can also cause a disconnect between valuation and reality when float or FDV is misunderstood or ignored by unresearched token buyers. The existence of buyers who don’t consider valuation seems highly unlikely to me. It’s more likely that token buyers simply don’t review or take these metrics into account.
To protect and inform themselves, token buyers need to evaluate the balance between circulating supply, FDV, and demand for tokens being unlocked. They should consider: what is the cost basis for locking up supply, what is the OTC demand for locked tokens in private markets, and how eager existing holders are to sell those locked tokens.
Finally, a reported high circulation may actually be a low circulation.
I think this could be an innocent example of a token launch that has become popular recently:
Upon closer inspection, you’ll notice that only about 2% is attributed to “Community Sales.” The rest of the unlocked circulating supply is attributed to the “Ecosystem Growth Fund,” described as a portion of tokens set aside for growth incentives, such as airdrops, as well as developers, educators, researchers, and strategic contributors within the project’s ecosystem.
As an outsider, it is impossible to know how this portion of the ecosystem is distributed. We don’t even know if it is distributed at all. For this token, the actual (sellable) liquidity is probably only about 2-3% — even though 15% is reported as unlocked circulation. This could mean that the market cap is almost 90% lower than stated due to inactive supply and OTC transactions included in the circulation.
This suggests that simply assessing the percentage of unlocked supply is not enough. In fact, obfuscating and exaggerating the actual (traded) supply size may actually be a superior technique for bad actors, especially if market participants are conditioned to believe that “low supply = bad”.
Token purchasers should investigate who holds the unlocked supply, how it is being used, and whether they are able to distribute that portion of the supply.
This “private price discovery” occurs in a rigged market, and the resulting valuations are deceptive. In my opinion, one of the main problems with the low float/high FDV debate lies here.
The problems people have with “low float” or “high FDV” are really because price discovery occurs in a private market that can be manipulated, illusive, or both.
Let me introduce you to that – Phantom Market (I wanted to call it Shadow Realm, but I’m trying not to be obsessed with Yu-Gi-Oh!).
Imagine a market where a person named Kane controls all the supply of a new token. In this market, anyone can bid, but only Kane can sell.
Kane sells some tokens to a new investor named Adam at a $50 million valuation. Adam's tokens are locked and non-transferable. Kane sells more tokens to another new investor, Eva, at a $300 million valuation. Eva's tokens are also locked and non-transferable.
Adam and Eva had a good reputation as investors (perhaps because of their biblical fame?), so other investors became interested in Kane’s tokens.
Kyle, Bob, and Taylor Swift all bid in the next round at a valuation of $1 billion - Kyle decides Bob is the best investor and Bob also buys the locked tokens.
Hurt by the rejection, and afraid of missing out on this amazing new token, Kyle bids at a $2.5 billion valuation, and Kane sells him some of his locked tokens.
At this point, Adam’s investment has grown 50x. He’s desperate to sell. He’s been writing Twitter posts for the past few years and now he’s finally getting huge success. In fact, he’d even be happy to sell at the previous round’s valuation of $1 billion.
Eva's earnings grew roughly 10x, and she was happy to sell at a valuation north of $1 billion.
But since these holders are not allowed to sell - the only one who can sell doesn't have much reason to lower the selling price (it's a rigged market that can only go up).
This “virtual market” that occurs before tokens begin to circulate is an illusion. Rather than discovering a natural price based on supply and demand dynamics, it is simply designed to find the highest price venture capitalists are willing to pay. This dynamic drives valuations to prices the market cannot bear, as evidenced by the graveyard of tokens that traded well below private market valuations in 2020-2022.
When Kane’s tokens land on Binance or Coinbase, the virtual market does not stop, but evolves a little.
Let’s say that now Kayle’s token is trading at a $5 billion valuation. Even those Kayle’s who panic-bought later on made a 2x profit. Now every investor is willing to sell their tokens - maybe now someone has accused Kayle of engineering something unethical behind the scenes, or some new guy has designed a better version of Kayle’s product.
Investors were eager to sell and were unable to sell their locked tokens in the market. They were unable to exit their holdings until their unlock/unlock expired. So, these investors tried again using the private market (selling at a 60% premium to the market price).
The real market is now priced at $5 billion, but in the virtual market, the token is valued at $2 billion.
The gap between the circulating token price and the locked token price is the real problem with low circulation tokens.
If the virtual market price of a low-circulation token is significantly lower than its actual price, unlocking it will obviously be very painful.
(On the other hand, low circulation and impending unlocking may not mean a lot if the virtual market price is close to the actual price. Solana’s locked tokens are said to sometimes trade at a 15% discount to unlocked Solana — and nearly all locked SOL tokens have been acquired by MultiCoin, Jump, Alameda, or others.)
Price discovery in the public marketplace creates healthier markets.
The reason the unlocking of certain assets causes a massive drop in price is because price discovery never actually occurs - simply the highest bidder is tested.
The huge gap between virtual market prices and actual prices. Most market participants cannot track virtual prices, which means they find it difficult to assess the expected risk of unlocking any given asset.
opt out
Parts 2 and 3 of this series will explore the incentive structures of various other market participants and use these to further explain the dynamics of new launches. Specifically, who benefits and why new launches are able to maintain such inflated valuations.
These sequels will also discuss ideas and solutions to existing market dynamics that good players can leverage to create healthier markets – while discussing why this is in their interest.
In the meantime, however, I can offer a simple suggestion to readers who do not have the ability to change the infrastructure dynamics.
Buying an overvalued FDV is your choice - you can opt out, and you probably should
It seems obvious, of course, but the mantra of "invest first, research later" doesn't seem to be working for a lot of people. Or maybe a lot of you are skipping the research part.
Token market cap information and FDV information are always public - if the project is decent, unlocking information is usually recorded somewhere in some public way. Token economics usually show who owns the supply. It is more difficult to find private round prices, but it is possible.
If any of this basic information is missing (this is a red warning)! If any of this basic information looks confusing or confusing (this is a major red warning).
Even if you think the project is good, you don’t have to buy these tokens.
In fact, opting out and expressing protest by not participating seems to be the right response for many recent token launches.
If the existing model fails, or the market refuses to accept it, then projects, founders, exchanges and other market participants will have to adjust their go-to-market strategies.
I’ve seen a few projects adjust their plans for launching and raising tokens due to the popularity of memecoins and the recent malaise of the metaverse narrative.
Token buyers should research valuations before buying, and if they don’t like the valuation then they should refuse to participate.
If you think a new project is the greatest idea on the planet and you want exposure, it is still important to evaluate the valuation and unlock schedule. Until full unlock, it is very likely that great projects will have poor token dynamics, or perhaps the valuation is simply too high to be worth investing in at that moment in time.
It is currently not possible to participate “early” in new token launches (and as we have seen, upside capture has already happened in a way that is difficult to access).
Rather than trying to be early, it is better to be disciplined and patient. Identifying projects that interest you and evaluating them as valuations become attractive seems to be a much better approach than joining the latest CEX-affiliated Twitter KOL craving the yield on a token that launched 30 minutes ago.
The good news is that for most of these tokens (good projects, but with a lot of unlocks or VC overhang, or potentially bad token dynamics in a few years), it’s possible that market participants will learn the wrong lessons from these assets and write them off completely during their early turbulent times — perhaps giving you a better entry reward later than expected.
Newly launched projects are no longer worth investing in today, primarily due to the privatization of price discovery and unhealthy inflated valuations in the venture capital market that ignore supply and demand. These market dynamics can be exploited by unscrupulous people, and increasingly sophisticated market players are using them for their own gain.
While FDV is higher than it was a few years ago, popular and touted new projects always price their tokens at FDVs in the top valuation range of the market. This has been the case for at least the past 5 years — and this is largely due to the privatization of price discovery.
Projects like Avalanche and Solana have seen “upside” since launch:
Part of this was driven by overall market returns.
Avalanche has outperformed roughly 7x since its public market debut, while Ethereum has outperformed roughly 9x over the same timeline.
But also because of the additional repricing that has occurred due to their position in the market.
Solana’s rise from the top 25 to the top 5 saw a significant repricing with Ethereum and the rest of the market.
Avalanche rose from the top 15 to the top 10 and then fell back, resulting in a temporary repricing with Ethereum (and the rest of the market) during the bull run that has since been erased.
When evaluating the upside of a new token, token buyers should consider how the new token’s FDV compares to the rest of the market — as well as how the overall market is trending.
If a new project’s valuation places it in the top 3 of all cryptocurrencies in existence, then for this investment to perform well the investor needs to have a massive market expansion and the project needs to maintain its top 3 position as it does not have much room to grow compared to the market.
If a new project’s valuation puts it in the top 30, and investors consider it a top 10 project, then perhaps low circulation and a high FDV are less important when valuing that token.
While $1 billion may seem expensive for a token today — if Solana hits $1,000 in a few years and is worth $1 trillion, then yes, maybe $1 billion will look cheap in retrospect and people will complain about new projects being valued at $80 billion.
Judging new tokens based solely on their performance in the first few months of launch can also be misleading — Solana’s price fell 50% from its listing price and failed to recover to its initial price in a few months. Solana will need to attract new capital inflows during a bull run to re-price its position in the market.
In the absence of an ongoing market trend, market participants are unlikely to experience a large-scale early market repricing because a) private markets extract upside potential b) it is difficult to fight market forces to underprice something in a high-demand market, and c) if there is very little circulating supply, projects, exchanges, and market makers may fight market forces to overprice something.
Market participants should expect valuations of new launches to remain elevated when market demand is high. In the context of privatization gains, it is no longer possible to participate “early” — instead, investors should aim to discover market value that others have overlooked or that is mispriced and out of favor.
Token buyers should strive to improve their assessment of new token valuations and supply and demand dynamics, and identify those with high FDVs that are based on supply and demand realities and those that are virtual markets that are extremely volatile.
Withdrawing from participating in these markets is a vote with capital.
Good founders want to build successful projects and they know that market dynamics will impact the perception of their projects. The overperformance of meme coins and the underperformance of new token launches have caused future founders to adjust their fundraising and launch plans.
Hope to see you guys soon, part 2 will have more questions and maybe solutions, who knows. I don't know how long this post is. I'm afraid to check it. I apologize to everyone.
