Waiting for a project to mature enough before launching a token is just as important as avoiding high FDV.
Written by: 0xLouisT
Compiled by: 1912212.eth, Foresight News
In Greek mythology, Icarus and his father Daedalus made wings out of feathers and wax to escape King Minos' labyrinth. Daedalus warned his son: Fly too low and the sea water would wet your wings. Fly too high and the sun's heat would melt them. Icarus got so caught up in the thrill of flying that he flew higher and higher, forgetting his father's warning. The sun's heat melted the wax on his wings and Icarus fell into the sea. The moral of the story is that excessive arrogance often leads to failure.
I see striking similarities to the Icarus story in the current cryptocurrency cycle. Just as Icarus was drawn to the ecstasy of flight, many crypto projects are drawn to the lure of high valuations. Both Icarus and these projects have failed due to unsustainable promises and inflated valuations.
Why is FDV popular?
There are multiple factors behind this:
- Anchoring bias: This is a cognitive bias where decisions are based on an initial reference point. If a project founder believes their project is worth $1 billion, they may start with a $10 billion FDV in the market, forming an anchoring psychology in the market. Even if the token price drops by 90%, it will return to what the founder believes is a reasonable value.
- Venture Capital Valuation: This topic is complex, but the flood of VC funds in 2021/2022 has led to high valuations in the private market. VCs enter round after round at high prices, but the public market has no interest in these high-valuation projects. In order to avoid a valuation lower than the previous round during the public offering, project owners are forced to find other ways to issue tokens at a higher valuation.
- Incentives and Treasury: $10 billion in FDV will give projects enough resources to attract top talent, retain employees by issuing tokens, provide ecosystem funding and promote cooperation with other projects, and use these huge "paper wealth" to promote the growth of projects.
- Supply distribution: Due to the SEC crackdown, it has become more difficult to distribute tokens through the community. Airdrops and community incentive mechanisms often fail to effectively distribute large token supplies in the early stages, which remains a major obstacle facing the industry.
- OTC Trading and Hedging: Although difficult to do at scale, high valuations can be monetized through discounted over-the-counter (OTC) trading or hedging.
- Appearance of success: People tend to think that high valuations represent success because of their way of thinking. Higher valuations create the illusion of success and attract more people to participate.
These factors together drive the phenomenon of low circulation but high FDV in crypto projects.
Why this happens
If you create a token A with a supply of 1 billion and allocate it to a Uniswap pool with 1 USDC, the technical value of token A is $1, giving it a FDV of $1 billion. This valuation is completely artificial; the actual value of the token is still minuscule.
For high FDV tokens, the same principle applies, the actual circulating supply is only a small fraction of the total supply. After the initial airdrop selling pressure subsides, the majority of the supply is held by market makers and large holders who can influence the price. Therefore, even with only tens of millions of dollars, a FDV of $1 billion can be achieved.
Disadvantages of high FDV
High FDV creates a severe imbalance in the distribution of costs and supply between TGE liquidity buyers and private placement investors (see chart). This rift triggers continued tension between the groups until mean reversion occurs.
TGE buyers are at a loss after buying, while VCs are incentivized to sell after the tokens are unlocked. When community buyers realize this pattern, they stop buying, which is a big reason why they have no interest in new Altcoin recently.
A healthier scenario is one where there is less price imbalance between the community and VCs, allowing true price discovery to occur (see chart below).
In an efficient market, price discovery is a must. Although you can artificially influence prices in the short term, it only delays the time for prices to converge to the true price. However, the market is path-dependent, so a long downward trend before reaching the true price is much more painful than starting directly in equilibrium.
inference
An important detail from the myth of Icarus is the warning against flying too low. Just as flying too low might get his wings wet, launching a token at too low a valuation might stifle its growth potential. It might turn off partners, make it difficult to retain talent, and affect overall success. Waiting for a project to mature enough before launching a token is just as important as avoiding a high FDV.
Key Points
- FDV is not a gimmick: Avoid launching tokens at high FDV. Trying to manipulate the game by inflating valuations like Icarus may backfire in the long run. For stream investors, high FDV tokens are like a red flag — they usually avoid or even short inflationary assets.
- Raise VC money wisely: Raise capital only when necessary and in alignment with your growth strategy. Choose VC firms you are comfortable working with, not just the ones with the highest valuations. Avoid accepting valuation pressures that are unsustainable.
- Don’t launch your token too early: Don’t launch your token just to achieve a high FDV in the private market. Make sure you have clear signs of market PMF before launching your token.
- Token distribution: This is another topic, but for efficient price discovery, the circulating supply should be maximized at launch. The goal should be at least 20% to 50% of the total supply, not just 5%. However, the current regulatory environment may make this difficult to achieve.
- Interact with Liquidity Funds: Liquidity funds are established players that take on the risk of projects after the TGE, so they play a crucial role in price discovery - not VCs.
