Written by: ROUTE 2 FI
Compiled by: Luffy, Foresight News
We will explore the current issuance of Altcoin and the impact on the market. There is a trend in this cycle where a large number of new tokens are launched in a high FDV, airdrop mode, followed by a large number of tokens unlocked by VCs.
Crypto assets are reflexive, so what will happen to the market under this trend?
Reflexivity: The Big Idea of Feedback Loops
Reflexivity is a theory originally proposed by George Soros, who believes 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.
Cryptonary believes that when analyzing market movements and how they work, it is important to remember that the concept of market reflexivity goes against conventional wisdom. In theory, markets are always seeking equilibrium and all participants are rational people who make decisions based on facts. Bubbles, capitulation events, and boom and bust cycles are all examples of abnormal market volatility; prices will eventually return to equilibrium. Prices have nothing to do with the factors that establish this equilibrium.
On the other hand, in market reflexivity, where everyone makes judgments based on their own understanding of reality, prices do affect market fundamentals. You can see this happening: if pricing affects fundamentals, then price changes must also affect fundamentals, which in turn affect investor expectations, and investors act on these revised expectations, which in turn affect prices. Boom-bust cycles are caused by positive feedback from market reflexivity, as herd behavior reinforces price changes, which moves prices further and further away from reality and eventually becomes the new reality.
Prices should tend toward equilibrium, but because of the reflexive nature of markets, prices often exceed or fall below equilibrium levels for long periods of time. Prices only begin to turn when market participants realize that their view of the market is no longer based on reality; this usually happens long after prices have exceeded or fallen below reasonable levels.
As you can see, reflexivity works both ways; a ball thrown into the air will eventually fall back to the ground.
If Bitcoin rises significantly in a short period of time, it is almost certain that its price will continue to rise for a while after the initial fluctuation. This is also true from another perspective. The cryptocurrency market is still in its infancy and is therefore more prone to large price fluctuations.
The above picture perfectly describes reflexivity. I think you have a good understanding of this concept now.
Now, let’s look specifically at Altcoin and what will happen to the market as a whole as a result of the launch of a slew of new tokens.
New high-quality token launches are beneficial
I’ve written about the supply and demand issues of cryptocurrencies before, but I’ll reiterate them here.
- Market Cap: Circulating Supply x Price
- Fully Diluted Valuation (FDV): All tokens (including unissued tokens) x Price
This is very important to understanding the VC/Angel play.
Most cryptocurrency companies raise money from investors through SAFTs (Simple Agreement for Future Tokens). In the stock market, SAFTs can be compared to Simple Agreement for Future Equity (SAFE), which allows startup investors to convert their cash investment into equity at a future point in time if certain conditions are met.
To illustrate what a typical SAFT transaction looks like, let's take a simple example.
- Token Name: Yolo Coin
- FDV: 100 million
- Vesting conditions: TGE 10%, followed by 1 year lock-up, then 3 years linear vesting
- Circulating supply at TGE: 12% (partially via airdrop)
Yolo Coin is officially launched after a lot of hype, and the FDV has now reached 1 billion (10x return for seed investors). Investors are happy because they can sell at breakeven price and they still have 90% of the allocated tokens, which will be gradually unlocked within 36 months (after 1 year lockup period).
But wait? Why is the lockup period so long for VC? In short, it’s to ensure long-term alignment so that it doesn’t get passed on to the TGE.
Let's look at why this is problematic:
Since investors’ tokens are locked up for so long, this means that when they finally start to unlock, the market will face constant selling pressure. See the chart below.
Assume that the initial price of Yolo Coin is $1 (investor price = $0.10). The supply on the market at the time of issuance is 12%, but we know that as tokens are gradually 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?
You could argue that prices will rise due to narrative X, Y, and Z, increased TVL in DeFi protocols, bullish events, etc., and this may continue for a while. But at some point, supply will outstrip demand and we will start facing a downward spiral due to massive inflation.
Early buyers will get stuck, leading to bearish sentiment in the community, lower TVL in the protocol, developers (if any) leaving for greener pastures, team members exiting, etc.
Thor Hartvigsen summed it up well: “The market will not be able to absorb all the additional liquidity, and airdroppers will want to cash out instead of ‘staking in exchange for more airdrops in the future’”.
The biggest change so far this cycle is that the money is dispersed. We are used to thinking that Altcoin will go up together. Now there may be 300 good projects, but there is not enough liquidity for them all to go up.
We often hear about the Altcoin craze, but I think this time it will be different. We are used to hearing that all coins will rise as long as the time is right. But is this true?
Keep in mind that there are many more "utility" tokens on the market today than in 2021. There are now 3-5 "quality" tokens entering the market every week. The total market cap is up and everyone seems happy. But ask yourself, who is going to buy all these tokens. Unless institutions or retail investors rush in en masse, it will just be a PvP game.
An example from two weeks ago was the Wormhole airdrop, which had an FDV of over $10 billion when it launched. Now ask yourself why you would own it. I don't see any reason other than a purely speculative perspective. Since launch, the W token price has fallen 40% and has an FDV of 6 billion.
As Cobie puts it:
“Market capitalization is a measure of demand, while FDV is a measure of supply.”
This means that the market cap is the total value of public demand, and it rises and falls with price movements. If the price rises, the market cap and FDV increase together, but the market cap also increases when tokens are unlocked.
Let’s look at Pendle. Everyone loves Pendle these days, and its TVL has increased significantly due to point farming and the EigenLayer narrative.
Pendle market value: $640 million, FDV: $1.7 billion
Also, note that Pendle has 95M of its 258M tokens in circulation (37%). As the token price goes up, the market cap goes up too. However, a rising market cap does not mean that demand for those locked tokens will go up. To explain why, think about it from an investor's perspective. I know someone who bought Pendle for less than 10 cents. It's now priced at over $6. Do you really think the investor who unlocked their tokens cares if the price is $6 or $7? No, so they sell. The result is: supply goes up, but demand stays the same. (I didn't check Pendle's unlock schedule, nor do I know the FDV people had when they invested, just made some assumptions to explain supply and demand).
Are high FDV tokens scary? Not always, a good example is TIA, which was launched in November 2023. TIA currently has a FDV of $12 billion, but since the locked tokens will not be available until the fall of 2024, the situation does not look that bad, but some traders may be scared by the high FDV.
For more on this, see Cobie’s article: https://cobie.substack.com/p/on-the-meme-of-market-caps-and-unlocks
OK, but back to the previous question: where is the demand, in other words, where are the buyers?
There are new “quality” projects launching every week with high FDVs. This means that there is an endless supply flooding the market, and unless new buyers come in, these tokens are bound to fall (at least in the long run).
Retail investors are here and they hold Memecoin and Solana Altcoin. They are not buying fancy VC tech tokens. They have learned from their experience in 2021. Permissionless token listings and money-hungry VCs are very bad for individual token holders in the long run. Hundreds of new tokens are launched every year and existing tokens are constantly diluted.
It is now April 2024 and inflows into Altcoin appear to be more selective and insufficient to offset the massive token unlocking.
Is there any solution?
We already know that low float token models are not user friendly. But can we fix this?
Obviously, a big part of the problem is the number of projects launched. Not everyone can buy into all of them. But a more linear unlocking schedule and retroactive airdrops might be wise (as opposed to Arbitrum): think of Ethena and EtherFi, which are doing two rounds of airdrops. Maybe resuming the ICO would help, which would create more loyal fans.
Return from here:
I think when BTC.D trends lower and Altcoin are free to float, there will be a handful of Altcoin that will surge higher. There are more players in the crypto space right now than in the last cycle, but people are smarter now. We will go through a rotation like we have in the past 6 months, and blindly being bullish on coins could be a losing game.
According to Thiccy, $250 million worth of Altcoin supply enters the market every day from new tokens and unlocked old tokens. Due to upward reflexivity (positive feedback loop), most of these tokens are not sold immediately because the market is rising (reluctant to sell). This is why we saw a large sell-off in April, the market just needs a reason first (war).
By 2024, token unlocks, new tokens entering the market, and staking rewards for existing tokens have resulted in an increase of $250 million in Altcoin daily supply. Due to the number of new tokens issued, FDV has grown faster than the circulating supply, increasing by about 70% year-to-date. The spread between FDV and circulating supply (which represents how much supply will enter the market in the future) has increased by more than $150 billion year-to-date. As the flow of funds into mainstream coins slows, the weight of daily Altcoin supply becomes more and more obvious.
Regardless, the total Altcoin market cap is steadily increasing as new tokens are launched and new supply enters the market.
The examples above are some of the high market cap/FDV coins. Look at Worldcoin: market cap is $1 billion, but FDV is $64 billion. What does this mean?
This means that Worldcoin will have a stable market supply in the future. In July 2024, they will start a crazy sell-off, with 6 million WLD tokens entering the market every day. For reference, there are currently 181 million $WLD tokens on the market...
Obviously, this is extremely dangerous.
Using basic supply and demand curves, it’s easy to see that it’s difficult for WLD prices to rise as this supply floods the market.
Who will buy 6 million WLD tokens every day?
What does this mean for the bull market?
If BTC and ETH keep going up, things might not be too bad. But in bear market conditions, we will see terrible things happen.
However, I like Anteater's approach of long on strong currencies and short on weak currencies. It is a hedging strategy, not delta neutral like Ethena. It sounds strange to hedge in a bull market, but on the way up, there will be several downtrends. It is not a straight line to the top.
Also, a few recent posts on CT say that this cycle is already 70% over. Who knows, so decide the risk based on your tolerance.
I think most of the new VC coins (high FDV coins) will eventually fall sharply. You can take advantage of this in a scalping or hedging strategy.
Examples of weak coins could be STRK, APE, BOME, ADA, CRV, and XRP. Alternatively, if Altcoin are outperforming overall, combine these weak Altcoin with strong Altcoin. Currently strong Altcoin are ENA, TON, FTM, PENDLE. However, as market momentum is ever-changing, it is not recommended to long/ short on these coins.
The great thing about Memecoin is that they are actually one of the few honest coins. WIF, PEPE, $DOGE, POPCAT, the circulating and total supply are the same. No one is dumping on you with a crazy unlocking schedule, it's just player vs. player.
Finally, here are some words from cryptocurrency trader Wazz:
I think his argument makes a lot of sense. Too many Altcoin, too many projects, and too many unlocked tokens will hit the market in the future.
If the price of Bitcoin rises significantly in a short period of time, then after the initial rise, the price will almost certainly continue to rise for a period of time. The reverse is also true. The low liquidity of the cryptocurrency market means that it is "easier" for prices to rise and fall sharply.
