Author: JieXuan Chua, Brian Chen, Binance Research
Compiled by: 0xjx, Golden Finance
1. Main Points
In recent months, the crypto community has been dominated by tokens with high valuations and low initial circulation. This market structure has raised concerns about limited sustainable upside for traders after the TGE.
Data from CoinMarketCap and Token Unlocks confirms the growing trend of tokens being issued with low circulation and high valuations. Notably, approximately $155 billion worth of tokens are expected to be unlocked from 2024 to 2030. This large number of tokens flooding the market will create selling pressure if there is no corresponding increase in buyer demand and capital inflows.
Factors such as an influx of private market capital, aggressive valuations, and optimistic market sentiment have contributed to the trend of tokens being issued at high fully diluted valuations (“FDVs”).
The current market conditions require investors to be more discerning and cautious, considering fundamental aspects of projects such as token economics, valuation, and products. Project teams may also need to consider the long-term impacts associated with token economics design.
VCs continue to play an important role in our industry and can work with project teams to ensure fair supply distribution and reasonable valuations.
2. Market Observation
In recent months, the crypto community has been dominated by tokens with high valuations and low initial circulation. This market structure has raised concerns about limited sustainable upside for traders after the TGE.
This concern is not unfounded. It has become common for tokens to be issued with low circulation, with the majority of tokens released in the future. In bull market conditions, these tokens could quickly increase in price due to the limited liquidity available for trading at the time of issuance. However, it is clear that this price growth is unsustainable when a wave of token supply is unlocked.
Additionally, the FDV of newly issued tokens that are comparable to established layer 1 or DeFi tokens that have stood the test of time and have user appeal has also attracted attention. Overall, market participants are now aware of the impact of those low circulation and high FDV tokens.
In this report, we explore this market trend in more detail. We first detail our observations on the increasing number of high-FDV token issuances and discuss potential market impacts and their significance. We then analyze the root causes of this trend, specifically private market activity as a possible contributing factor. Finally, we offer some recommendations for identifying and mitigating the negative impacts of this trend, with a focus on recommendations tailored for investors and project teams.
2.1 Low flow rate, high FDV
There is a clear trend that recently issued tokens are issued at high valuations and low circulation. This is especially evident when we compare tokens issued over the past few years - tokens issued in 2024 have the lowest ratio of market capitalization (“MC”) to FDV. This suggests that a large number of tokens will be unlocked in the future.
Figure 1: MC/FDV for tokens issued in 2024 is the lowest in the past three years
Source: Twitter (@thedefivillain), CoinMarketCap, Binance Research, as of April 14, 2024
Figure 1 shows the market capitalization and FDV of tokens issued over the past three years, highlighting the widening gap between these metrics over time. It is worth noting that, although 2024 has just begun, the FDV of tokens issued in these months is already close to the total amount in 2023, highlighting the prevalence of overvalued tokens.
The MC/FDV of tokens issued 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, approximately $8 billion in demand-side liquidity will need to flow into these tokens to match the increase in supply. Although market cycles may change, this may not be easy.
Examining some recently issued tokens reveals the root cause of the high FDV in 2024. Figure 2 shows several tokens issued in recent months and their percentage of circulating and locked supply. With circulating supply as low as 6% and no tokens exceeding 20%, the root cause is obvious.
Figure 2: Recently issued tokens have extremely low circulating supply
Source: CoinMarketCap, Binance Research, as of May 14, 2024
For the same amount of demand, low circulating supply leads to a higher initial token price, which in turn drives 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) gives a sense 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
Source: CoinMarketCap, Binance Research, as of May 14, 2024
It is important to note that FDV alone does not paint a complete picture and they are not as meaningful as FDV ratios (e.g. FDV/Total Locked Value, FDV/Revenue, etc.) because these ratios take operational metrics into account.
In the past few months, many projects have issued their tokens, many with low circulation and high FDV. Due to the large number of such projects, we have only selected a few for display. 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.
2.2 Market impact and its significance
The issuance of tokens with low circulation has an impact on market dynamics, especially increasing selling pressure. According to the report of Token Unlocks, approximately $155 billion of tokens are expected to be unlocked from 2024 to 2030.
While this number is an estimate, the implications are clear – a large amount of token supply is expected to be released in the coming years, and without corresponding capital inflows, many tokens will face significant selling pressure.
Given this, it is crucial for investors to understand the token unlocking schedule and keep track of it to avoid being caught off guard when tokens are unlocked on a large scale.
Figure 4: $155 billion to be unlocked in the next few years
Source: Token Unlocks, Binance Research, as of May 14, 2023
A related observation is that the Meme token has outperformed other tokens so far this year. In addition to significant awareness and strong speculative demand, their token supply structure has also played a role in this year’s rally.
Figure 5: Meme tokens are the best performing theme so far this year
Source: Dune Analytics (@cryptokoryo_research) as of May 14, 2024
Most Meme tokens were already unlocked and in circulation at the time of the TGE, eliminating selling pressure from future dilution. Many had an MC/FDV ratio of 1 at the time of issuance, meaning holders would not be further diluted by the token issuance. This structure played a role in the appeal of Meme tokens, especially as awareness of the impact of large-scale token unlocks increased. While the success of Meme tokens should not be attributed entirely to dissatisfaction with low circulating supply of tokens, it is clear that retail investors have shown great interest in Meme tokens, even if these tokens may lack utility.
Similar to the famous "GameStop short squeeze" event in the stock market, many retail investors see Meme tokens as a means to counter the advantages that institutions gain in private rounds. This is because Meme tokens are usually issued in a way that is open to anyone, and institutional players have little opportunity to obtain tokens in advance at a low price. As a result, Meme tokens have become an important theme in the current market, continuing to attract large trading volumes and strong price fluctuations.
3. How did we get here?
High valuations, combined with continued selling pressure from token unlocks, are structurally negative for token prices. However, as observed in the previous section, this situation has become more prevalent in recent years. Several factors contribute to this situation.
3.1 Influx of private market capital
VC funds are increasingly becoming key players in the crypto investment space. Despite the natural fluctuations in investment capital due to market cycles, VC capital flowing into the crypto space has been steadily rising since 2017. Total VC funding invested in crypto projects since 2017 has exceeded $91 billion, demonstrating the importance of VC in providing the necessary funding for projects.
Figure 6: Cumulative VC funding since 2017 has exceeded $91 billion
Source: The Block, Binance Research, as of May 13, 2024
However, this massive increase in investment has also led to a corresponding rise in VC’s influence in shaping crypto market valuations. As more money flows into the space and VCs participate in more deals, they essentially drive valuations upward.
As a result, when tokens are launched on the public market, their prices and valuations are already inflated. In fact, large private market fundraisings have led to tokens reaching multi-billion dollar valuations at launch, making it more difficult for public market investors to profit from future growth.
3.2 Aggressive Valuation
Strong market performance this year has boosted sentiment and driven more aggressive deal activity, which has led some investors to become more willing to invest at higher valuations.
Considering that multi-million dollar valuations have become the norm, being cautious about valuations could actually put VCs at a disadvantage with their LPs by meaning they miss out on the majority of deals when deal activity is high. While market activity remains below its 2022 peak, the number of crypto deals in Q1 2024 increased 52.1% month-over-month to reach its highest level in nearly two years.
Figure 7: Deal activity has increased this year
Furthermore, in a bull market, VCs have incentives to continue deploying capital. As long as the music keeps going, high valuations will boost VC performance metrics. Furthermore, it is advantageous for a project to raise large amounts of capital at a high valuation, as this provides it with working capital without significant dilution. This also shows the strong support of "smart money".
In general, raising funds in private rounds at high valuations means stakeholders have an incentive to publicly release tokens at a higher fully diluted valuation (FDV).
3.3 Optimistic market sentiment
With the crypto market value growing by 61% in the first quarter of the year, market sentiment during this period was clearly very positive. CoinMarketCap’s Fear & Greed Index was in the “Greed” and “Extreme Greed” ranges for 69 of the 91 days in the first quarter. Accordingly, project teams were able to take advantage of this positive investor sentiment, allowing them to raise funds at higher valuations in the first quarter.
This is evident from the increase in valuations in Q1. Specifically, VC-backed crypto companies saw pre-money valuations rebound 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 than in the previous quarter.
Figure 8: Pre-investment valuation rebound in the first quarter of 2024
4. Some thoughts
4.1 For investors: fundamentals are important
The current market structure makes it even more important for investors to be selective. Given that many projects have high valuations from the outset, the probability of “speculating” on new tokens to achieve sustainable returns is low. Most of the upside and easy money opportunities may have already been captured by early private market investors.
Whether investing in a private round or when a token is undergoing an initial coin offering (TGE), investors should conduct thorough due diligence and establish their own investment process. Some fundamental indicators and aspects worth paying attention to include but are not limited to:
Token Economics: The importance of unlocking schedules and unlocking periods cannot be underestimated as they directly impact the supply of tokens on the market. Without a corresponding increase in demand, this can lead to excessive selling pressure on token prices.
Valuation: FDV provides a rough sense of size but is not terribly meaningful on its own. Assess valuation ratios relative to other competitors and over time (e.g. FDV/Revenue, FDV/Total Value Locked, etc.).
Product: Consider where the project is in the product lifecycle (e.g., whitepaper stage or product already launched on mainnet). Is there product-market fit? Observe user activity (e.g., number of daily active addresses, number of daily transactions, etc.).
People: This includes the team and the community. What is the background of the founders and how have they contributed to the project? How engaged is the community and what are they most excited about the project?
Rather than aggressively chasing the next shiny coin, taking the time to evaluate fundamentals will help identify and avoid obvious risks and pitfalls. As Warren Buffett said, “Only when the tide goes out do you discover who’s been swimming naked.” Everything usually looks great until the music stops. Avoid being the last coin holder.
4.2 For project owners: Consider long-term development
Running a project is not easy given the numerous aspects and stakeholders that need to be considered. Decisions are complex and it is impossible to satisfy everyone. Nevertheless, we believe that one of the guiding principles of decision making is to consider long-term development.
Token Economics: Launching a token with low circulation and high FDV may help initial price growth due to limited token supply. However, subsequent unlocking creates significant sell pressure on the token. The project’s loyal token holders (arguably one of the most important groups in the community) suffer as a result. Poor token performance may also deter new ecosystem participants from joining the network as incentives are reduced.
In this regard, token distribution, unlocking, and vesting schedules should be carefully considered. Although token economics is more of an art than a science, with no magic number or method, it is clear that the circulating supply of recently launched tokens is very low, as shown in Figure 2. To mitigate the risks of a sudden increase in supply, teams and investors can consider token burning mechanisms, aligning vesting schedules with set milestones, and increasing the initial circulating supply during the TGE.
Product: While tokens can help gain market attention and are a great user acquisition tool, a viable product is key to value creation, user retention, and sustainable growth. Having at least one minimum viable product prior to TGE will help investors and users better understand the project’s value proposition and determine product-market fit. In the best case scenario, launching a product with significant user traction can foster a successful TGE by boosting confidence and attracting high-quality investors and users. In the long run, products increase the intrinsic value of a token and contribute to token price performance.
As funding activity rebounded in the first quarter, project founders were able to capitalize on rising sentiment to achieve higher valuations. However, while it intuitively makes sense to raise money at a high valuation (who would resist raising the same money with less dilution?), this comes with long-term consequences. Projects that raise capital at a significant premium to intrinsic value will need to demonstrate this premium in subsequent future private placement rounds or on the public markets. If it fails to do so, the token price may trend toward its true value. Investors will suffer losses, and the project team may struggle to reverse community sentiment.
V. Conclusion
Token economics is undoubtedly one of the most important considerations for investors and project teams. Every design decision comes with a set of benefits and trade-offs. While launching a token with a low initial circulating supply may drive initial price increases, the steady unlocking and issuance of tokens will create selling pressure, which will have an impact on long-term performance. If such a trend becomes the industry norm, the unlocking of billions of tokens in the next few years will make sustainable growth increasingly difficult unless the corresponding capital inflow can match these unlocks.
VCs continue to play a critical role in our industry, and tokens backed by VCs are not necessarily bad. Project teams and VCs should work together to ensure that supply distribution is fair and that valuations are reasonable.
