Article reposted from: Felix
Author: Keyrock
Compiled by: Felix, PANews
Key points:
More than $600 million worth of tokens are unlocked weekly
Regardless of scale or type, 90% of unlocks exert negative price pressure
The impact on token prices typically begins 30 days before the unlocking event
Larger-scale unlocks lead to significant price drops (2.4 times) and increased volatility
Team unlocks trigger the most severe crashes (-25%) and irrational sell-offs
Investor unlocks exhibit controlled price performance as they adopt more prudent strategies, reducing the market impact from unlocking.
Ecosystem development unlocks are one of the few factors with a positive impact (average +1.18%)
Introduction
Tokens worth over $600 million are unlocked weekly (equivalent to Curve's market cap). These tokens are typically released at scheduled intervals and flow into the hands of various participants. The scale and timing of these unlocks, as well as the recipients of these tokens, all impact token value and the market.
In a crypto landscape dominated by short-term decision-making and rampant profit-taking, the rhythm and structure of token unlocks are crucial for ensuring long-term value capture and enhancing holder satisfaction. Unlocks are not a novel concept. In traditional finance, mechanisms like equity vesting have long been used to incentivize employees to maintain alignment over the long term. However, the methods, frequencies, and impacts of token unlocks in blockchain projects vary widely.
In the 16,000 unlocking events analyzed in this article, a striking pattern emerged: unlocks of all types, sizes, and recipients almost always have a negative impact on prices.
This article adopts a trader-centric approach, studying some of the most prominent token unlocks in recent years. It analyzes how unlocks of different sizes and recipient types affect prices, identifying recurring patterns and key behavioral differences across the ecosystem.
Understanding unlocks
As a trader, you cannot gain insight into the overall retail buying or selling decisions, but you can understand the information of another group of holders, namely those on the vesting schedule. The unlocking timeline is key to unraveling the mystery; they not only imply future supply shocks but are also leading indicators of sentiment and volatility.
Most vesting schedules look like the table above: a long-term calendar with "Cliffs" and "Linear or Bulk Unlock Blocks" marked in the middle. These blocks are designated for different recipients—categories like "Seed Investors," "Core Contributors," or "Community."
Designing unlocks is a tricky task for any project. You cannot simply pre-gift all tokens, as recipients may leave and sell them. But you also cannot make them wait too long, or they may perceive the project as unworthy. Projects must strike a balance: incentivizing recipients to remain engaged during the early development of the project while also ensuring their long-term participation. Solutions often involve distributing tokens gradually over a specified vesting period.
A typical unlock might look like this: the vesting period starts from the relationship between the recipient and the organization and lasts until full distribution. For most crypto projects, these are outlined early in the white paper. Within the first ⅓ ± ¼ of the vesting period, there may be no allocations. Then, a large batch of tokens is released all at once, followed by linear unlocks for the remainder of the time.
This approach is effective because it ensures that recipients make minimum commitments before receiving rewards. For example, developers are incentivized to continue participating, while investors face an initial lock-up period followed by partial cash-outs; gradual unlocks can alleviate market pressure.
Not all unlocks follow this structure. Some, referred to as "bulk unlocks," release all tokens at the end of Cliffs. Others are purely linear, starting from no Cliffs, with tokens distributed regularly until fully allocated.
Unlocking scale, a key factor in price dynamics
This article first dissects the vesting period of 16,000 compound events and classifies each event by size. For each event, daily token prices are tracked for 30 days before unlocking and 30 days after unlocking. Additionally, the "median" price and volatility metrics for each token are tracked for the month prior to the 30-day pre-unlocking period. This is crucial as many projects adopt monthly unlocking schedules. This method is not perfect, but it can better isolate smaller-scale unlocks.
Ultimately, no asset can exist independently of the market. This is especially true for altcoins, which often exhibit extreme beta correlation with their protocol tokens. To illustrate this, the price changes in each unlock's dataset have been normalized.
To simplify, this article uses ETH as a benchmark and weighs the prices in the sample (before, during, and after unlocking events) against ETH to derive a more market-independent metric.
Unlocking scale does not represent everything.
After dissecting, categorizing, and quantifying unlocking events, average price impacts across different time intervals post-unlocking are plotted. When visualized, the data appears quite chaotic. You might expect a proportional relationship between unlocking scale and price impact, but the correlation weakens after 7 days.
When scaled relative to size, most unlocks appear similar in the extent of price suppression they cause. In contrast, frequency is the more telling factor. As mentioned earlier, unlocks often occur in a single large batch shortly after the initial Cliff, or continue to occur until the vesting period ends. For any unlock other than large or massive unlocks, a similar observation is made regarding smaller, stable unlocks resulting in ongoing downward price pressure. Thus, it is difficult to discern the good from the bad of unlocking scale size.
Cliffs and linear gaps
The behavior characteristics of larger-scale unlocks before events are clearer in the data. Prices typically show a continuing decline in the 30 days before the event, accelerating in the last week. After unlocking, prices often stabilize within about 14 days, returning to neutral levels.
This price behavior may be attributed to two main phenomena:
Complex hedging: Large unlocks are often allocated to recipients using market maker hedging. By locking in prices or taking advantage of volatility before unlocking, these parties reduce token pressure and mitigate the direct effects of the unlock. Most companies start hedging 1-2 weeks or even a month in advance, depending on size. If executed properly, this strategy can effectively minimize the market impact of the unlock.
Retail anticipates early: The sharp drop in the final week may be due to retail participants pushing prices down in anticipation. They know unlocking is imminent, so they sell tokens to avoid dilution, often unaware that the unlocking recipients may have already completed sales through hedging.
This behavioral pattern is also evident in the weighted trading volumes across different categories, typically peaking 28 or 14 days before unlocking.
Interestingly, the data shows that massive unlocks (> 10% of supply) perform as well or even better than large unlocks (5%-10%). This may be due to the inability to fully hedge against the scale of the unlock, and the inability to sell or unwind within 30 days. As a result, their market effects tend to be more gradual and lasting.
The last chart highlights the changes in volatility. Large unlocks cause significant volatility on the first day. However, this volatility largely dissipates within 14 days.
How to trade?
In most cases, the key is to focus on the calendar for major and large unlocks. These often mark the transition to linear unlocks. For any given unlock, the proportion granted by Cliffs can vary significantly, ranging from 10% to 50%. What truly matters is how much the unlock represents relative to the total supply.
Data shows that the best time to enter after significant unlocks is 14 days later, when volatility has stabilized and hedging may have been unwound. For exiting, the best time is 30 days before significant unlocks, when hedging or market pre-reactions often begin.
For smaller-scale unlocks, it is often best to wait until they are completed.
Recipient type, a key predictive factor for price impact
When analyzing unlocks, the second and most important factor is the type of recipient. Who are the recipients of the tokens, and what does this mean for price behavior? Recipients can vary widely but are typically divided into five main categories:
Investor unlocks: Tokens allocated to early investors as compensation for funding the project.
Team unlocks: Tokens reserved to reward the core team, either through one-time payments or as salaries.
Ecosystem development unlocks: Injecting into the ecosystem to fund activities such as liquidity, network security, or grants.
Public/community unlocks: Tokens distributed to the public through airdrops, user rewards, or staking incentives.
Burn unlocks: Tokens solely for burning, reducing supply. These are rare and therefore not included in this analysis.
There is disagreement regarding which type of recipient has the greatest impact on downstream prices. Some argue that community airdrops are mostly conducted by Sybil attackers, thereby flooding the market with selling pressure. Others believe that injecting millions of tokens into the ecosystem dilutes value. Still, others contend that VCs and investors are the fastest to sell off, capitalizing on profits.
Through the analysis of thousands of unlocking events, the data indicates:
Almost all categories show negative price impacts, but there are nuances.
Ecosystem development unlocks have minimal disruption, whereas team unlocks consistently lead to the largest price declines.
Investor and public/community unlocks have a moderate impact on prices.
However, like unlocking scale, these numbers alone do not tell the whole story. When you plot price trends by recipient type within 30 days before and after unlocking events, different behaviors emerge.
What drives the behavior of recipients?
At first glance, team unlocks appear to be the most disruptive, while ecosystem unlocks seem almost harmless. But these are only surface insights. What accounts for the differences? What drives recipients' behavior? What lessons can the protocol learn from this data?
Team unlocks
Team unlocks are among the categories most detrimental to price stability. You should exercise caution when the team is approaching Cliffs or in the midst of distribution.
When charting, the impact on token prices follows a roughly linear downward trend, starting 30 days before the unlocking date and continuing to decline at a steep angle. Team unlocks tend to exhibit two characteristics that make them more impactful on prices than other recipient categories.
Team members' uncoordinated sell-offs:
Teams typically consist of multiple participants with different financial goals and lack a coordinated approach to liquidating their tokens.
Many team members view their tokens as compensation for long-term (sometimes years) labor before receiving appropriate rewards. When these tokens unlock, especially near Cliffs, the motivation to realize profits is understandably high.
Even with linear unlocks, these tokens are often part of their income and need to be sold.
Lack of hedging or mitigation strategies:
Unlike large investors or institutions, teams seldom employ complex techniques to reduce market impact when selling.
Experienced entities often recruit market makers to strategically manage large token distributions.
Moreover, pre-hedging strategies can reduce the direct pressure on the market over time when unlocking occurs.
So this explains why the price is so negatively impacted, but why is a price drop also observed in the 30 days prior? This is largely likely due to a combination of severe price impacts and overlapping linear unlocks. Why attempt to control the median price before observation, as many unlocks are continuous, and the data still shows suppression. In this regard, if you do your utmost, not only to skip bulk Cliffs unlocks but also to delay purchases during the linear period of unlocking.
Ecosystem development unlocks
In terms of ecosystem development, a unique trend is observed: a slight price decline in the 30 days leading up to unlocking, followed by an immediate positive price impact afterward. Unlike other types of unlocks, ecosystem development unlocks typically guide tokens into plans that create long-term value and reinforce the protocol.
Why does the price rebound after unlocking (and often increase):
Liquidity provision: Tokens are often allocated to lending platforms or liquidity pools, increasing market depth, reducing slippage, and enhancing overall token availability. By enhancing "market availability," these unlocks not only stabilize trading conditions but also bolster participant confidence.
Participation incentives: Ecosystem funds often drive user engagement through incentive programs. These initiatives (such as liquidity mining or staking rewards) create a flywheel effect of participation, promoting network activity. As participants recognize the potential for sustained growth, they are less likely to sell immediately and choose to continue investing in the ecosystem.
Grants and infrastructure funding: Developer grants and funding for infrastructure projects support the creation of dApps and network scalability. While the benefits of these investments often take 6-12 months to materialize, they indicate a long-term commitment to ecosystem growth, alleviating short-term selling pressure.
How to explain the price drop before unlocking? There are two reasons for this behavior.
Anticipated sell-offs: As mentioned earlier, many investors pre-sell before unlocking, believing that increased token supply will dilute value, regardless of the purpose of the unlock. This is especially common among retail participants, whose misunderstandings of unlock types drive short-term decisions.
Liquidity preparation: A large number of recipients of grants or allocations often need to prepare liquidity in advance. For instance, to establish a liquidity pool on a DEX, recipients may sell existing assets to secure stablecoins or other pairing assets. This preparatory sell-off can exert downward pressure on prices even before token deployment.
Investor unlocks
Investor unlocks are among the most predictable events in the token market. Unlike other categories, these unlocks typically exhibit controlled price performance; 106 unlocking events show a consistent trend: slow, minimal price drops. This stability is not coincidental. Early investors, whether from angel rounds or Series C, often have a VC background and expertise in managing positions.
These investors are not simply transferring risk; they are actively avoiding potential market disruption while optimizing returns. By understanding the complex strategies they employ, traders can anticipate how these events will unfold and adjust their positions accordingly.
OTC trading desks: Investors often hire liquidity providers or OTC desks to sell large amounts of tokens directly to interested buyers. This method entirely bypasses the public order book, avoiding immediate selling pressure and signaling the market.
T/VWAP and hedging: Time-weighted average price (TWAP) execution or volume-weighted average price (VWAP) strategies help to disperse token sales over time, reducing price impacts. Many investors also pre-hedge their positions using futures to "lock in" prices before unlocking events. They then gradually unwind these positions after unlocking to further reduce volatility.
"Locking" or "hedging" effectively involves opening short positions using derivatives before the unlock date, which helps to secure prices early when the short position is unwound during token sales.
Since 2021, the use of advanced options strategies has expanded beyond investors, with an increasing number of project teams adopting them to generate recurring revenue or manage funds more effectively. For traders, this evolution reflects the increasing complexity of the crypto market, releasing opportunities to align predictions with strategies from key participants. Options, whether sold privately or used as collateral for loans, play a crucial role in shaping market dynamics, providing informed traders with a clearer perspective to interpret token activities.
Community and public unlocks
Community and public unlocks, such as airdrops and point-based reward schemes, behaviorally reflect investor unlocks, with prices gradually declining before and after the event. This dynamic is shaped by two different behaviors among recipients:
Immediate sell-off: Many retail participants liquidate their rewards upon receipt, prioritizing liquidity.
Long-term holders: Most public airdrops are held rather than sold, reflecting a batch of participating users or less active traders.
While the overall price impact may be minor, these results underscore the importance of thoughtfully designed incentive programs. Careful design can prevent unnecessary market disruption while achieving the intended goals of fostering community development and engagement.
Summary
Token unlocks are an essential mechanism in the crypto ecosystem for funding development, incentivizing participation, and rewarding contributors. However, the intervals, scales, and recipient categories are key factors that determine their price impacts. Understanding what these impacts are and why they occur helps facilitate better trading and assists protocols in better structuring their unlocks.
This article analyzes over 16,000 unlocking events for 40 tokens, highlighting key trends:
In terms of reducing short-term destructiveness to price, linear unlocks outperform initial Cliffs unlocks, although larger Cliffs often recover better after 30 days.
The most significant price movements often do not stem from token recipients, but from retail reactions to narratives and broader sentiment.
Recipient category dynamics
Ecosystem unlocks: Ongoing positive outcomes driven by liquidity provision, user incentives, and infrastructure financing.
Investor unlocks: Minimal disruption due to complex strategies like OTC sales, TWAP/VWAP execution, and options hedging.
Team unlocks: The most disruptive category, with poor coordination and immature sell-off strategies leading to significant price drops. Teams can mitigate the impact by collaborating with market makers.
Community unlocks: Limited long-term impact as many recipients hold tokens, but short-term "miners" often sell tokens for immediate gains.
Conclusion
Before making long-term trades, be sure to check the unlocking calendar using tools like CryptoRank, Tokonomist, or CoinGecko. Unlock events are often misunderstood, but they play a crucial role in token performance.
Contrary to popular belief, VC and investor unlocks are not the primary drivers of price declines. These participants usually align with the long-term goals of the protocol, employing strategies that limit market disruption and maximize returns. In contrast, team unlocks require closer scrutiny, as mismanaged distributions often lead to downward pressure on token prices. Ecosystem unlocks present a unique opportunity; when aligned with clear growth objectives, they often become catalysts for adoption and liquidity, making them a favorable time to enter the market.
Related Read: How to Solve the Token Unlock Selling Pressure Dilemma? Hack VC Proposes Two Potential Solutions.