Is the market structure broken? Are venture capitalists too greedy? Is this a rigged game targeting retail investors? Almost every theory I've seen on this seems to be wrong. But I'll let the data speak for itself.
Here’s a widely circulated table, provided by @tradetheflow_, showing that a bunch of coins recently listed on Binance are all underperforming. Most of these are derided as “high FDV, low float” tokens, meaning they have huge fully diluted valuations (FDV) but very little first-day circulation.
I graphed all of these and removed the labels. I excluded any obvious memes, as well as coins that had a token generation event (TGE) before Binance, such as RON and AXL. Here’s what it looks like, with BTC (beta) in yellow:
Almost all of these "low liquidity, high FDN" Binance listings have fallen. What is the reason for this? Everyone has their own theory about what’s wrong with market structure, and the three most popular ones are:
- Venture Capitalists (VC)/Key Opinion Leaders (KOL) sell to retail investors
- Retail investors are abandoning these tokens and buying Meme instead
- Supply is too small to enable meaningful value discovery
All of these are reasonable theories, let's see if they are correct. To conduct scientific research, we need a null hypothesis to disprove. Here, our null hypothesis should be: these assets have all been repriced, but there is no deeper market structure problem (the classic "more sellers than buyers"). We will discuss each theory one by one.
VC/KOL sell to retail investors
If this were true, what would happen?
We should see that tokens with shorter lock-up periods sell off faster than others, while projects with longer lock-up periods or without KOLs should perform well. (Perpetual contracts may also be another avenue for this sell-off)
So what does the data show?
Therefore, from listing to early April, these tokens actually performed well, with some prices higher than the listing price and some prices lower than the listing price, but most were concentrated around 0. Until then, no VC or KOL seems to have started selling.
Then, in mid-April, everything fell at the same time. Although these projects were listed on different dates and had many different VCs and KOLs, did all of them unlock and start selling to retail investors in mid-April?
Let's say I'm a VC. There are definitely cases where VCs are selling to retail investors. Some VCs do not have a lock-up period. They will conduct hedging transactions off-site and even violate the lock-up period. But these are low-level VCs, and most of the teams working with these VCs cannot be listed on first-tier exchanges. Every A-list VC that you can think of has at least a one-year waiting period and several years of unlocking before receiving tokens. The one-year waiting period is effectively mandatory for anyone regulated by the SEC under Rule 144a. For a large VC like us, our positions are too large to conduct hedging transactions off-market, and we are generally contractually obligated not to do so.
So this story doesn’t make sense for the following reasons: all of these tokens are less than a year away from the token generation event, which means that VCs with a one-year lockup period are still locked up!
Maybe some of these low-level VC projects did sell tokens in the early stage, but all projects fell, and even the first-tier VC projects were in the lifting period.
Therefore, investor/KOL selling may be real for some tokens - there will always be projects with bad behavior. But if all coins fall at the same time, this theory cannot explain it.
Retail investors are abandoning these tokens and buying Meme instead
If this is true, we should see prices drop as these new tokens come to market, and retail investors turn to buying memes.
However, what we see is:
I compared the trading volume of SHIB tokens with these tokens, and the release time does not match. Meme mania reached its peak in March, but the tokens began to decline a month and a half later in April.
Here’s the Solana decentralized exchange (DEX) trading volume, which tells the same story. The meme exploded in early March, well before mid-April. Therefore, this is also inconsistent with the data. Following the decline of some of these tokens, there was no widespread inflow into Meme trading. People are trading memes, but they are also trading new coins, and trading volumes don’t convey a clear message.
The problem is not volume, but asset prices.
That said, the story many are trying to push is that retail investors have become disillusioned with real projects and are now primarily interested in memes. I went to Binance's Coingecko page and looked at the top 50 most traded coins, and roughly 14.3% of Binance's trading volume today was generated in memes. Meme trading is just a small part of the cryptocurrency world. Yes, financial nihilism is a thing and is very prominent on social media, but the majority of the world still buys coins because they believe in a certain technological story, whether right or wrong.
Well, maybe it's not actually retail investors moving money from VC's tokens into Meme, but here's a sub-theory: VCs own too many shares of these projects, and that's why retail investors are angry and leaving. . They realized (in mid-April?) that these were scam VC tokens and that the team + VC owned ~30–50% of the token supply. This must have been the straw that broke the camel's back.
It's a satisfying story. But I've been investing in the crypto venture space for a while. Here is a snapshot of token distribution from 2017 to 2020:
Look at the red shaded area - that's how much shares insiders (the team + investors) got. SOL 48%, AVAX 42%, BNB 50%, STX 41%, NEAR 38%, and so on. The situation is similar today. So if the theory is "the token wasn't a VC coin in the past, but it is now," then that doesn't fit the data either. Regardless of the cycle, capital-intensive projects will always have excess ownership by teams and investors at launch. These “VC tokens” ultimately succeeded, even after the tokens were fully unlocked.
Overall - if what you're referring to happened in a previous cycle, it doesn't explain the unique phenomenon happening right now.
So this "retail investors raged out and traded memes" story sounds real and very compelling, but it doesn't explain the data.
Supply is too small to enable value discovery
This is the most common theory I've seen. Sounds reasonable! It's less noticeable, which is one of its strengths. Binance Research even published a good report illustrating this issue:
It looks like the average is about 13%. That's obviously very low, obviously much lower than what coins have been in the past, right?
The average circulating supply of these tokens at the time of generation in the last cycle was 13%.
The same Binance Research article also has a chart that has also been widely circulated online, showing that tokens launched in 2022 will have an average circulating supply of 41% at launch.
I was there in 2022 and the project was not launched with 41% of the circulating supply.
I checked the Binance list for 2022: OSMO, MAGIC, APT, GMX, STG, OP, LDO, MOB, NEXO, GAL, BSW, APE, KDA, GMT, ASTR, ALPINE, WOO, ANC, ACA, API3 , LOKA, GLMR, ACH, IMX.
I randomly checked a few of them since they don’t all have profiles on TokenUnlocks: IMX, OP and APE Similar to the latest batch of tokens we are comparing, IMX had 10% of the circulating supply on day one, APE The float on the first day was 27% (but 10% of that was in APE vaults, so I rounded it to 17% of the float), and the OP had a float of 5% on the first day.
On the other hand, you also have LDO (55% unlocked) and OSMO (46% unlocked), but these projects were already live a year before they were listed on Binance, so compare these lists with the latest batch of listed projects It would be foolish to make comparisons. I guess it's these non-day one tokens plus random corporate tokens like NEXO or ALPINE that lead to this crazy high number. I don’t think they are determining the true trend of TGE — they are determining the trend of what types of tokens are listed on Binance each year.
Okay, maybe you'll admit that 13% of circulating supply is similar to past cycles. But that’s still not enough for value discovery, right? The stock market does not have this problem. The median float for 2023 IPOs is 12.8%.
But seriously, having an extremely low circulating supply is definitely a problem. WLD is a particularly serious example, with only about 2% of its circulating supply. FIL and ICP also had very low liquidity at the time of listing, resulting in very poor price charts. However, the majority of this batch of Binance tokens are within the historically normal first-day circulation range.
Furthermore, if this theory is correct, you should see the coins with the lowest circulation being punished, while the coins with higher circulation should perform well, but we don’t see a strong correlation, they are all falling.
So this lack of value discovery argument sounds convincing, but after reviewing the data, I’m not convinced.
solution
People keep complaining but only a few come up with actual solutions! Before we discuss the null hypothesis, let's examine them.
Many people have suggested relaunching the ICO. Sorry — don’t we remember the brutal post-market sell-offs of ICOs that left retail investors burned? Also, ICOs are illegal almost everywhere, so I don't think this is a serious suggestion.
@KyleSamani believes that investors and teams should unlock 100% immediately - which is not possible for US investors due to Section 144a (which would also exacerbate the "VC sell-off" problem). Additionally, I think we learned the benefits of team locking in 2017.
@arca believes that tokens should have underwriters like traditional IPOs. I mean, maybe? Token listings are more akin to direct listings, they are listed on an exchange and have some market makers, and that’s about it. I think that's fine, but I prefer a simpler market structure and fewer middlemen.
@reganbozman suggested that the project should be listed at a lower price so that retail investors can buy in earlier and get some upside. I understand the spirit, but I don't think it works. Artificially lowering the price below the market clearing price just means who can catch the mispricing in the first minute of trading on Binance. We have seen this happen many times with NFT minting and IDOs. Artificially undervaluing your listing will only benefit the few traders who blow the order book in the first 10 minutes. If the market believes you are worth X, in a free market your value by the end of the day will be X.
Some have suggested we go back to fair launch. Fair start sounds good in theory but doesn't work well in practice because teams jump ship. Believe me, everyone tried this method during the summer DeFi period. Besides Yearn, what other non-Meme fair startups have been successful in the past few years?
Many people suggested that the team conduct a larger airdrop. I think this is reasonable! We generally encourage teams to try to provide more supply on day one to improve decentralization and value discovery. Still, I think it would be unwise to do ridiculously large airdrops just to increase circulation — the protocol has a lot more to do after day one to be successful. It would be unwise to release all the token supply at once on listing day just to get a huge amount of circulation, because in the future, you will face competition for token awards. You don’t want to be one of those coins that has to re-increase the coin supply after a few years because the finances are exhausted.
So as a VC, what do we want to see happen here? What we want to see is for token prices to reflect reality in the first year. Our returns are not based on price increases, our returns are based on DPI, which means we must eventually liquidate our tokens. We can't support ourselves on paper increases, nor will we mark unlocked tokens to market (anyone who does that is crazy in my opinion). For VCs, it is actually very bad for VCs to have valuations reach astronomical figures, only to plummet after unlocking. This can lead LPs to believe that this asset class is fake and looks good on paper but is terrible in reality. We don't want this. We would rather have asset prices rise gradually and steadily over time, which is what most people want.
So are these high valuations of FDV sustainable? I have no idea. Compared with the initial launch prices of projects such as ETH, SOL, NEAR and AVAX, this is obviously a jaw-dropping figure. But it’s also true that cryptocurrencies are bigger now, and the market potential for successful crypto protocols is clearly much greater than it was in the past.
@0xdoug makes a good point - if you normalize past altcoin token FDV with today's ETH price, you get a number that's almost equal to the current FDV we see now. @Cobie also mentioned this in his recent post. We're not going back to L1 at $40 million FDV because everyone sees how big the market is now. However, when SOL and AVAX launched, the price paid by retail investors was comparable to the adjusted price of ETH.
Much of this frustration is actually due to the fact that cryptocurrencies have soared so much over the past 5 years. Startup pricing is based on comparables, so all numbers will be larger. That's the truth.
Well, it's easy for me to criticize other people's solutions. But what is my clever solution?
I don't know either.
The free market will take care of itself. If the token falls, then other tokens will be repriced, the exchange will push the team to list with a lower FDV, the traders who were cheated will only buy the token at a lower price, and the venture capitalists will also A message is passed to the founder. The price signal will eventually spread as Series B rounds will be priced lower due to public market comparisons, which will chagrin Series A investors and eventually seed investors.
When there is a real market failure, you may need some clever market intervention. But the free market knows how to solve the problem of mispricing—just change the price. Those who are losing money, whether VCs or retail investors, don’t need think pieces or Twitter debates from people like me. They have learned their lesson and are willing to pay lower prices for these tokens. This is why all these tokens are trading at a lower FDV and future token trades will be priced accordingly.
This has happened before, it just took a while.
Null hypothesis
Now let’s lift the veil and see what exactly happened in April that caused all the coins to drop.
The culprit: the Middle East.
In previous months, most of these tokens traded essentially flat after their listings until mid-April. Suddenly, Iran and Israel started threatening World War III, and the market fell sharply. Bitcoin rebounded, but these coins did not.
So, what’s the best explanation for why these coins are still down? My explanation is: these new projects are psychologically classified as "high-risk new tokens." Interest in "risky new tokens" dropped in April and has not recovered, and the market doesn't want to buy them back.
Why? I have no idea. Markets can be fickle at times. But if this basket of "high-risk new tokens" rose 50% during this period, instead of falling 50%, would you still argue about how the token market structure was broken? That would also be a mispricing, just Just the opposite direction.
The market will eventually correct mispricings. If you want to help the market repair, sell high and buy low. If the market is wrong, it will fix itself. No need to do anything else.
How should I do it?
When people lose money, everyone wants to know who to blame. The founder? Venture capitalist? KOL? Exchange? Market maker? trader? I think the best answer is no one. But thinking about market mispricing in terms of blame is not an effective framework. Therefore, I will elaborate on this issue from the perspective of what people can do better under the new market mechanism.
Venture Capitalists: Listen to the market, slow down, and maintain price discipline. Encourage founders to be realistic about valuations. Don’t mark-to-market your locked tokens (as far as I know, almost all top VC firms hold their locked tokens at a significant discount to market price). If you find yourself thinking, "There's no way I'm going to lose money on this trade," then you're likely to regret the trade.
Exchanges: List tokens at lower prices. Consider pricing the token through a public auction on day one, rather than pricing based on what happened in the last round of venture capital. Don’t list the token unless everyone (including KOLs) has a market standard lock-up period, and don’t even list the token unless all investors/teams are contractually obligated not to hedge. Better to show retail investors the FDV countdown chart we all know and love and provide them with more knowledge about unlocks.
Team: Try to release more tokens on the first day. Less than 10% of the token supply is too low.
Of course, make healthy airdrops and don't worry too much about low valuations on day one. To build a healthy community, the best price list is one that increases gradually.
If the team’s token drops, don’t worry. You are not alone. remember:
- AVAX is down about 24% 2 months after listing.
- SOL fell about 35% 2 months after listing.
- NEAR fell about 47% in the 2 months after listing.
You'll be fine, just focus on building something to be proud of and keep pushing forward, and the market will eventually figure it out.
To you, Anonymous: Beware of single-factor interpretations. Markets are complex and sometimes they go down. Be suspicious of anyone who claims to know for sure why. Do your own research and don't invest anything you're not willing to lose.
