By José Maria Macedo

Compiled by: TechFlow

FDV is indeed not a meme, and since this post was published, I have been talking to OTC brokers to try to understand the secondary market structure for the assets I shorted. The results were quite illuminating, so I thought I would share them with you.

All in all, I don’t think these are bullish unlocks.

Many of these assets have active sellers, but few are bidding below 70% of the market price (we are talking about a standard SAFT with a 1 year cliff and 2/3 year vesting period).

In terms of volume, my rough estimate based on conversations with various brokers is that total SAFT volume is about $100 million. Considering that these assets have tens of billions of dollars in unrealized gains that will be unlocked over the next few years, this is basically the end of the story.

To put it bluntly, Call Unlock wants to see the lowest possible unrealized gains to market cap ratio, as explained in the linked article.

Most tokens are sitting on massive unrealized gains from the team (0 cost basis) and early investors (you can calculate this yourself using tools like cryptorank.io).

Coupled with extremely low float rates (generally 5-15%), most projects are traded at 4-8 times the market value of unrealized earnings, which means that the project's total circulating market value has 4-8 times the unrealized earnings.

Assuming a 2 year timeframe from the Cliff Day, this means that the entire market cap worth of assets unlocks every 3-6 months. This will be hard to attract buyers, especially if their alternative beta exposure is to memecoins and other assets that don’t have excess supply.

One way to reduce this effect (besides increasing the initial float) is high pre-issuance secondary trading volume, ideally as close to the current market price as possible.

This helps reset the cost basis of unlocked tokens and radically reduce the unrealized gain market cap ratio (e.g. the now famous Multicoin SOL assist leading to the first unlock)

Unfortunately, I don’t see that happening in the OTC market.

Relatedly, I am trying to understand market structure. I don’t want to single out specific assets, but there are a lot of assets that have the following characteristics

  • Extremely high unrealized gains to market value ratio;

  • There is no secondary demand even at ~70% below market price;

  • Funding rates on Binance remain positive, with open interest reaching eight figures;

Who would covet this stuff on a CEX, but not be interested in buying it on the secondary market at a 70%+ discount?

My assumption is just that there are special frictions on both the buyer and seller sides.

I don't know a lot about the buy side, but I think if they're spending money to be long these things, they're likely unsophisticated retail gamblers who don't understand vesting schedules or OTC desks.

Sellers may include:

a) Founders/Teams, who have more than 90% of their new coins in locked token bags and therefore have no collateral or inclination to short;

b) Investors in venture capital funds who cannot or do not have a setup to short assets on CEX;

That’s why the opportunity to short these assets and profit from them still exists.

By the way, contrary to what the CT doomsayers tell you, this does not mean that all cryptocurrencies are scams, or even that all assets with high market capitalizations of unrealized gains will go to zero.

I am very bullish on cryptocurrencies and believe there will be some category winners that rise through their unlocking because they do have real-world applications.

However, there will be long tail assets that “go to zero.” This is natural and what you would expect in an asset class that provides liquidity to early stage venture capital.

After all, most venture capital investments fail. In traditional venture capital, only a very small number of elite companies go public and have liquidity, while the long tail of projects fail quietly.

In the cryptocurrency space, a higher percentage of venture capital projects end up having not only spot liquidity, but also liquid derivatives markets. This is unheard of in traditional venture capital and is what makes crypto venture capital a unique asset class.

This also means that the long-tail failures of crypto ventures will be public and painful, with both parties to the transaction either making or losing a lot of money, rather than failing quietly.

This also means that there will be more structural short opportunities in cryptocurrencies than in any other asset class. In a way, you can basically bet money on the empirical fact that most startups fail.

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