How Low Float Tokens and Big Unlocks Can Wreck Your Gainz

By Michael @ CryptoEQ | CryptoEQ | 15 May 2024


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Lock-up and Vesting Schedules

One aspect of a token’s tokenomics is the available/circulating supply. When evaluating the performance of decentralized finance (DeFi) tokens and forecasting future performance, it is crucial to consider the distribution of tokens held by treasuries, developers, and early investors. Many tokens have a lock-up period where certain individuals are granted early or discounted access to purchase the token, with the condition that these tokens must be held for a specific minimum period. The number of tokens held in lock-up can have a significant impact on the markets, particularly if token holders seek to liquidate their holdings.

Solana unlock headline

Example headline in the past over concerns from a Solana unlock. Source

dydx unlock headlines

A recent example of simply delaying an eventual unlock resulted in a ~20% increase in token price. Source

Cryptocurrency projects often employ smart contract technology to facilitate token vesting. This process utilizes smart contracts to automate the transfer of assets once specific predefined conditions have been met, similar to how a vending machine releases a product once the appropriate amount of payment has been received.

Token vesting serves to establish a clear timeline for token issuance and accessibility. Tokens that are vested are locked within a smart contract, thereby eliminating the ability to sell the token during a designated lock-up period. The use of smart contracts in token vesting provides a high degree of rigidity and, as long as the code has no bugs/backdoors, investors can rest easy knowing those assets cannot be accessed.  Once the contract is deployed, the lock-up conditions cannot be changed by the deployer or any other external party, and must be fulfilled before the tokens can be released from the contract.

Immediate Vesting

There are different approaches to token vesting, all with their own pros and cons depending on the project and which side you're on (the team vs. retail investor). One of the most straightforward options is immediate vesting, where employees/investors receive 100% of their shares right away. This is typically used for long-term employees who are not expected to leave the company in the near future.

Linear Vesting

Another popular vesting schedule is linear vesting, where employees gradually earn ownership of a percentage of their shares over a set period of time. For example, in a five-year linear vesting schedule, a team member would earn 20% of their shares after the first year, 40% after the second year, 60% after the third year, 80% after the fourth, and 100% after the fifth year. If the employee leaves the company before the vesting period is over, they will only retain the percentage of shares they have earned up until that point.

Reverse Vesting

A reverse vesting plan also exists, where an employee is given all shares upfront but the company has the right to buy back any unvested shares if the employee leaves early. This plan is less common but can be useful for companies that want to retain key employees.

Cliff Vesting

Finally, there is cliff vesting, where shares cannot be awarded before a certain date. For example, a common vesting schedule might include a one-year cliff followed by four years of linear vesting. This plan is popular among startups as it helps retain employees as the company grows.

 

FDV and Low Float Tokenomics

  1. Low market cap to FDV ratio indicates potential inflation pressure:
    • The search results indicate that if the FDV is more than 10 times a token's current market cap, it could be a warning sign that the coin's current value is overinflated. 
    • A significant difference between a project's market cap and its FDV can signal that a coin's current value is overinflated and subject to potential inflation pressure as new tokens are unlocked and released into circulation. 
  2. High market cap to FDV ratio suggests more stable valuation:
    • Ideally, the difference between a project's market cap and its FDV should be relatively low. 
    • A high ratio of market cap to FDV is considered a positive, as it suggests the coin's valuation is more stable and less susceptible to inflation from future token unlocks.
  3. FDV provides insights into a crypto's future potential:
    • FDV can help investors understand the full scope of a cryptocurrency's potential market capitalization once all tokens are released. 
    • By comparing a crypto's current market cap to its FDV, investors can speculate on the coin's potential future value and assess whether the current price is reasonable. 

The analysis of low-float cryptocurrencies reveals that they constitute ~21% of the top 300 cryptocurrencies by market capitalization. This indicates that a significant portion of these large-cap cryptos have a majority of their token supply yet to be unlocked, resulting in a market cap to fully diluted valuation (FDV) ratio below 0.5.

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Among the large caps, the 4 lowest float cryptocurrencies are Worldcoin (WLD), Cheelee (CHEEL), Starknet (STRK), and Saga (SAGA), with market cap to FDV ratios ranging from 0.02 to 0.09. These low-float cryptos, all launched in 2023 or 2024, contribute to the evolving landscape of the crypto market.

Most low-float cryptocurrencies are recent additions, with 54 out of 64 large-cap low-float cryptos launched in the last four years. This influx of new projects, coupled with upcoming token unlocks, is expected to exert pressure on the crypto market.

High-float cryptos, constituting 54% of the top 300, have already unlocked more than half of their token supply. Nearly 29% of large-cap cryptos are almost fully diluted, with market cap to FDV ratios of 0.80 or higher, including established cryptos like Maker (MKR), Aave (AAVE), and Near Protocol (NEAR). Overall, the average market cap to FDV ratio of the top 300 cryptocurrencies stands at 0.73, showcasing the diverse distribution of float levels across the crypto market.

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Michael @ CryptoEQ
Michael @ CryptoEQ

I am a Co-Founder and Lead Analyst at CryptoEQ. Gain the market insights you need to grow your cryptocurrency portfolio. Our team's supportive and interactive approach helps you refine your crypto investing and trading strategies.


CryptoEQ
CryptoEQ

Gain the market insights you need to grow your cryptocurrency portfolio. Our team's supportive and interactive approach helps you refine your crypto investing and trading strategies.

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