Key Takeaways

◆The prevalence of tokens with high valuations and low initial circulating supplies has been a topic of discussion in the crypto community in recent months. This stems from the concern that this market structure leaves little sustainable upside for traders following a token generation event (“TGE”).

◆Data from CoinMarketCap and Token Unlock confirm the growing trend of token issuance with low circulating supply and high valuations. Notably, it is estimated that approximately $155 billion worth of tokens will be unlocked from 2024 to 2030. A large number of tokens entering the market will create selling pressure if there is no corresponding increase in buyer demand and capital flows.

◆ Factors such as the influx of private market capital, aggressive valuations, and optimistic market sentiment have contributed to the trend of issuing tokens at high fully diluted valuations (“FDV”).

◆The current market setup makes it imperative for investors to select and discern by considering fundamental aspects of projects, such as token economics, valuation, and product. Project teams may also need to consider the long-term impact of decisions related to token economics design.

◆VCs continue to play an important role in our industry by working with project teams to ensure fair supply distribution and reasonable valuations.

Market Observation

The prevalence of tokens with high valuations and low initial circulating supplies has been a topic of discussion in the crypto community in recent months. This stems from concerns that such market structure leaves traders with little to no upside when a TGE occurs.

This concern is not unfounded. It has become increasingly common for tokens to launch with a low circulating supply and allocate a large portion for future releases.

In bullish market conditions, the price of these tokens could appreciate quickly due to the limited liquidity available for trading at launch. However, it is clear that this price growth is unsustainable when a wave of token supply hits the market after unlocking.

Additionally, people are noticing newly launched tokens with FDVs comparable to established layer-1 or DeFi tokens that have stood the test of time and have proven user appeal. Overall, market participants now recognize the impact of tokens characterized by low circulation and high FDV.

In this report, we explore this market trend in more detail. We first detail our observations on the growing popularity of tokens issued at high FDV and discuss the potential market impacts and their significance. We then analyze the root causes of this trend, specifically how activity in the private placement market is a contributing factor. Finally, we propose several considerations to identify and mitigate the negative impacts of this trend, focusing on recommendations tailored for investors and project teams.

Low flow, high FDV

There is a clear trend of recently launched tokens with high valuations and low circulating supply. This is especially evident when we compare tokens launched in the past few years - tokens launched in 2024 have the lowest market capitalization (“MC”) to FDV ratio. This indicates that a large number of tokens will be unlocked in the future.

Figure 1: MC/FDV of tokens issued in 2024 is the lowest in the past three years

Figure 1 shows the market capitalization and FDV of tokens issued over the past three years, highlighting the growing gap between these metrics over time. Notably, despite being only a few months into 2024, tokens launched in the first few months already have FDVs approaching 2023’s totals, highlighting the prevalence of overvalued tokens.

The MC/FDV of tokens launched in 2024 is 12.3%, and a large number of tokens will enter circulation in the future. This also means that in order for these tokens to maintain their current prices in the next few years, about $80 billion of demand-side liquidity will need to flow into these tokens to match the increase in supply. Despite changes in market cycles, this may not be an easy task.

Examining some recent token launches reveals the underlying reason for the massive increase in FDV in 2024. Figure 2 shows several tokens launched in recent months, along with the corresponding circulating and locked supply percentages. With circulating supply as low as 6% and no higher than 20%, the underlying reason for this trend becomes apparent.

Figure 2: Recently issued tokens have low circulating supply

For the same amount of demand, a low circulating supply helps increase the initial token price due to liquidity scarcity, thus driving a higher FDV.

Comparing the peak FDV of the same group of tokens to the median FDV of the top ten tokens on the market (excluding BTC, ETH, and stablecoins) provides an idea of ​​the relative valuations of recently listed tokens. At their peak, some tokens had valuations similar to the largest tokens on the market, which have been around for years.

Figure 3: At their peak, some recently launched tokens had valuations similar to the largest tokens on the market

That said, it’s worth noting that FDV alone does not paint a complete picture and is less meaningful than FDV ratios that consider operating metrics (e.g., FDV/total value locked, FDV/revenue, etc.).

In the past few months, many projects have launched their tokens, many of which have low circulation and high FDV. Due to the large number of such projects, we have only selected a few of them for demonstration. Please note that this is only to illustrate the prevalence of low circulation and high FDV tokens, and does not reflect a negative assessment of the value or potential of the selected projects, as there are many other factors at play.

Market impact and implications

Issuing tokens with low circulating supply affects market dynamics, especially increasing selling pressure. According to a report by Token Unlocks, it is estimated that approximately $155 billion worth of tokens will be unlocked between 2024 and 2030. While this number is an estimate, the implications are clear - with a large amount of token supply expected to be released in the coming years, many tokens will face significant selling pressure without a corresponding inflow of funds.

In light of this, it is crucial for investors to understand token unlocking schedules and track them to prevent being caught off guard when a major token unlock occurs.

Figure 4: $155 billion will be released in the next few years

A related observation is the outperformance of meme coins so far this year. In addition to significant mindshare and strong speculative demand, their token supply structure can also be said to be one of the reasons for the rise this year.

Figure 5: Meme coin has become the best performing narrative coin year to date

Most Meme coins have all their tokens unlocked and circulated at the TGE, which eliminates selling pressure from future dilution. Many tokens have an MC/FDV ratio of 1 at launch, indicating that holders will not suffer further dilution from the generation issuance. This structure plays a part in the appeal of Meme coins, especially as awareness of the impact of significant token unlocking increases. While the success of Meme coins should not be attributed entirely to disdain for low-circulation tokens, it is clear that retail investors have shown great interest in Meme coins, even though these tokens may lack utility.

In a way, this is reminiscent of the famous "GameStop short squeeze" event in the stock market, where many retail investors see Meme coins as a means to counter the institutional advantages gained by participating in private financing. This is because Meme coins are usually issued in a way that anyone can obtain them, and institutional participants have little opportunity to obtain tokens in advance at a low cost. As a result, Meme coins have become an important narrative in the current market, and their large trading volume and strong price fluctuations have always attracted people's attention.

How did we get here?

High valuations, combined with continued selling pressure from token unlocks, are structurally unfavorable for token prices. However, as observed in the previous section, this situation has become increasingly common in recent years. Several factors contribute to this.

The influx of private equity capital

Venture capital (“VC”) funds have increasingly solidified their critical position in the crypto investment space. While investment capital naturally fluctuates due to market cycles, the amount of venture capital flowing into the crypto space has been steadily rising. Since 2017, total venture capital investment in crypto projects has exceeded $91 billion, demonstrating the growing prominence of venture capital in providing the necessary funding for projects.

Figure 6: Cumulative venture capital investment since 2017 has exceeded $91 billion

However, the significant increase in investment has also led to a corresponding rise in the influence of venture capital funds in shaping crypto market valuations. As more money flows into the space and venture capital firms participate in more deals, they are bound to push up valuations.

As a result, when tokens launch on the public market, their prices and valuations are already inflated. In fact, large private market financings result in multi-billion dollar valuations at launch, making it more difficult for public market investors to profit from future growth.

Aggressive valuations

Strong market performance this year has boosted sentiment and driven more aggressive deal activity, leading some investors to become increasingly willing to write checks at higher valuations.

Conversely, being picky about valuations can make VCs look bad in the eyes of their limited partners (“LPs”) given that multi-million dollar valuations are the norm, as it means they can’t participate in most deals when deal activity is very high. While market activity remains below its 2022 peak, the number of cryptocurrency deals in the first quarter of 2024 increased 52.1% month-over-month, the highest level in nearly two years.

Figure 7: Deal activity has increased this year

In addition, VCs have an incentive to continue deploying capital during a bull market. As long as the music doesn't stop, higher valuations will boost VC fund performance metrics. In addition, it is beneficial for projects to raise large amounts of money at high valuations because it provides them with working capital without severe dilution. This also shows strong support from "smart money".

In general, raising funds at high valuations in private rounds means stakeholders have an incentive to publicly issue tokens at a higher FDV.

Optimistic market sentiment

With the cryptocurrency market cap growing by 61% in the first quarter of this year, it is understandable that market sentiment during this period was very positive. Coinmarketcap’s Fear and Greed Index was in the “Greed” and “Extreme Greed” zones for 69 of the 91 calendar days in the first quarter. Accordingly, project teams were able to take advantage of this positive investor sentiment, enabling them to raise funds at higher valuations during the first quarter.

This is evident from the rise in valuations in Q1. Specifically, pre-money valuations of venture-backed crypto companies rebounded by more than 70% quarter-over-quarter in Q1 2024. This suggests that, on average, projects were able to raise the same amount of funding with less dilution compared to the previous quarter.

Figure 8: Pre-investment valuation rebound in the first quarter of 2024

think

For investors: Fundamentals matter

The current market landscape makes investor selectivity and discernment increasingly important. Given that many projects have high valuations at the outset, the likelihood of achieving sustainable returns through “copycat” new tokens is low. Most of the upside and easy money may have already been earned by early private market investors.

Whether investing in a private round or a token undergoing a TGE, investors should conduct thorough due diligence and establish their own investment process. A non-exhaustive list of basic indicators and aspects worth studying include:

◆Token Economics: The importance of unlocking schedules and vesting periods cannot be underestimated as they directly impact the supply of tokens entering the market. Without a corresponding increase in demand, there will be excessive selling pressure that drives token prices down.

◆ Valuation: FDV provides an overall sense of scale, but it is not very meaningful on its own. Assess valuation ratios relative to other competitors and relative to itself over time (e.g., FDV/Revenue, FDV/Total Value Locked, etc.).

◆Product: Consider where the project is in the product lifecycle (e.g., white paper vs. product launch on mainnet)? Is there product-market fit? Observe user activity (e.g., daily active addresses, number of daily transactions, etc.).

◆People: This includes the team and the community. What is the background of the founders? What are their contributions to the project? How engaged is the community? What are they most interested in about the project?

Rather than aggressively chasing the next shiny coin, taking the time to assess the fundamentals will help identify and avoid any discordant red flags and pitfalls. As Warren Buffett once said, “Only when the tide goes out do you discover who’s been swimming naked.” Everything may seem fine until the music stops playing. Avoid being the bag carrier.

For projects, think long term

Running a project is no easy feat given the multitude of aspects and stakeholders that need to be considered. Decisions are intricate and it is impossible to please everyone. That said, we believe that one of the guiding principles of decision making is to think long-term.

◆Token Economics: Due to the limited supply of tokens, launching a token with low circulation and high FDV may help the initial price increase. However, the subsequent unlocking may bring huge selling pressure on the token. The project's loyal token holders (arguably one of the most important groups in the community) will suffer losses. Poor token performance may also prevent new ecosystem participants from joining the network due to the decline in incentives.

In this regard, token distribution, unlocking, and vesting schedules should be carefully considered. While token economics may be more art than science, and there is no magic number or method, it is clear that the circulation rate of recently launched tokens is very low, as shown in Figure 2. To reduce the risks associated with sudden increases in supply, teams and investors can consider token burning mechanisms, align vesting schedules with set milestones, and increase the initial circulating supply during the TGE.

◆Product: While tokens can help attract attention and are a great user acquisition tool, a viable product is the key to value creation, user retention, and sustainable growth. Having at least a minimum viable product in place before a TGE will help investors and users better understand the project’s value proposition and determine product-market fit. In the best case, launching a product with significant user traction can facilitate the success of a TGE by boosting confidence and attracting high-quality investors and users. In the long run, the product increases the intrinsic value of the token and contributes to the token’s price performance.

With the rebound in funding activity in the first quarter, project founders have been able to take advantage of the boost in market sentiment to obtain higher valuations. However, while raising money at high valuations makes intuitive sense (who would say no to raising the same capital with less dilution?), it has longer-term consequences. Projects that have raised funds well above intrinsic value will have to justify their premiums in future private rounds or in the public markets. Failing to do so, token prices may decline and move closer to their true value. Investors suffer losses, and project teams may struggle to turn around community sentiment.

Conclusion

Token economics is undoubtedly one of the most important considerations for investors and project teams. Every design decision has its pros and cons. While issuing tokens with a low initial circulating supply may drive initial price increases, the steady unlocking and issuance of tokens will create selling pressure that will affect long-term performance. If this trend becomes an industry norm, sustainable growth will become increasingly difficult without corresponding capital inflows to match the unlocking of billions of tokens in the coming years.

VCs continue to play a vital role in our industry, and tokens backed by VCs are not necessarily bad. Project teams and VCs should work together to ensure fair supply distribution and reasonable valuations.

Welcome to BlockBeats the BlockBeats official community:

Telegram subscription group: https://t.me/theblockbeats

Telegram group: https://t.me/BlockBeats_App

Twitter Official Account: https://twitter.com/BlockBeatsAsia