Author: Haseeb, Managing Partner of Dragonfly; Translation: 0xjs@Golden Finance
Is the market broken? Are VCs too greedy? Is this a rigged game for retail investors?
Almost all the theories I've seen on this subject seem to be wrong. Let me explain with data.
This is a widely circulated table made by X user tradetheflow, showing that a group of tokens listed on Binance recently are mostly falling. Most of them are ridiculed as "high FDV, low circulation" tokens, which means that they have high fully diluted valuations but low circulating supply on the first day.
I charted all of these and removed the labels. I excluded any explicit meme coins, as well as tokens that had TGEs long before Binance listed them, such as RON and AXL.
As shown below, BTC (beta) is in yellow:
Almost all of these “low circulation, high FDV” Binance listed tokens are down. What could explain this? Everyone has a favorite theory about the disruption to market structure.
The three most popular theories are:
1. VCs/KOLs are selling to retail investors
2. Retail investors angrily abandon VC coins and only buy Meme coins
3. Supply is too small to allow meaningful price discovery
All make sense theories! Let’s see if they are true. But to keep things scientific, we need a null hypothesis to disprove. Our null hypothesis should be: these assets are all repriced, but there are no deeper market structure issues. (The classic “more sellers than buyers, over.”)
We will discuss each theory one by one.
1. VCs/KOLs are selling to retail investors
If so, what should it look like?
We should see tokens with shorter lock-up periods sell off faster than other tokens, while projects with longer lock-up periods or no KOLs should perform well. (Liquid perpetual contracts could also be another vector for this dumping.)
So what do we see in the data?
So from listing to early April, the tokens actually performed well — some were above the listing day price, some were below the listing day price, but most were concentrated around 0. Before that, there seemed to be no VC or KOL selling.
Then in mid-April, everything fell. Did all of these projects, despite being listed on many different dates and having many different VC investors and KOLs, unlock in mid-April and start selling to retail investors?
A little disclosure here. I am a VC. There are absolutely VCs that are dumping on retail investors, and yes, there are VCs that don’t do lockups, hedge off-exchange, or even break lockups. But these are lower-tier VCs, and most of the teams working with these VCs are not listed on tier-one exchanges. Every top tier VC firm you can think of has at least a 1-year lockup and multi-year vesting period before they can acquire tokens. In fact, a 1-year lockup is mandatory for anyone regulated by the SEC under Rule 144a. Also, for large VCs like us, our positions are too large to hedge off-exchange, and we are generally contractually obligated not to do so.
So here’s why this theory doesn’t make sense: every single one of these tokens is less than a year away from their TGE, meaning the VC with the 1 year lockup is still locked up!
Maybe some of these lower-tier VC projects sold their tokens early, but all projects are down, even the top VC projects that are still locked up.
So, for some tokens, the investor/KOL dumping may be true - there are always some projects with bad behavior. But if all tokens fall at the same time, this theory cannot explain it.
Next theory.
2. Retail investors angrily abandon these tokens and only buy Meme coins
If this is true, then what we should see is a drop in the price of these new token issuances and retail investors switching to meme coins.
Instead, we see this:
I charted a basket of so-called low circulation, high FDV tokens against Memecoin trading volume. The timing was wrong, by March, the Memecoin craze had reached crazy levels, but a month and a half later in April, the entire basket of tokens was sold off.
This is the volume on Solana’s DEX, telling the same story — memecoin exploded in early March before hitting mid-April.
So this is also inconsistent with the data. After the basket of coins with low circulation and high FDV fell, there was no widespread rotation in Meme coin trading. People are trading Meme coins, but they are also trading new coins, and the trading volume does not support the narrative that retail investors are abandoning VC coins and turning to Meme coins.
The problem is not the volume but the price of the asset.
That said, many are trying to sell the story that retail investors are disillusioned with real projects and are now primarily interested in meme coins. I went to Binance's Coingecko page and looked at the top 50 tokens by volume, and today about 14.3% of Binance's volume is coming from meme coin pairs. Meme coin trading is just a small part of what's happening in the cryptocurrency space. Yes, financial nihilism is a phenomenon and is very prominent in crypto Twitter, but most of the world is still buying tokens because they believe in some technical story, rightly or wrongly.
So, okay, maybe retail investors didn’t literally move from VC coins to meme coins, but here’s a sub-theory: VC firms own too many of these projects, and that’s why retail investors rage-quit. They realized (in mid-April?) that these VC coins were all scams, and that the project team + VC owned ~30-50% of the token supply. That must have been the straw that broke the camel’s back.
It’s a satisfying story. But I’ve been a crypto VC for a while. Here’s a snapshot of token distribution from 2017-2020:
Look at the red shaded area - this is the share of insiders (team + investors). SOL 48%, AVAX 42%, BNB 50%, STX 41%, NEAR 38%, etc. The situation is similar today. So if the argument is "the token was not a VC coin in the past, but it is now", then this is also inconsistent with the data. Regardless of the cycle, capital-intensive projects will always have teams and investors at launch. Even after the tokens are fully unlocked, these "VC coins" continue to succeed.
Generally speaking, if what you are referring to also happened in the previous cycle, then it cannot explain the unique phenomena happening now.
So this “retail investors are rage quitting and trading meme coins” story rings true and is a nice satire, but it doesn’t explain the data.
Next theory.
3) Token supply is too small to allow price discovery
This is the most common reason I’ve seen. It sounds good! It’s not so sensational, which is its advantage. Binance Research even published a great report on this issue:
It looks like the average is about 13%. That's super low, and significantly lower than past tokens, right?
correct?
Credit to 0xdoug for pulling this data. You guessed it, the average circulation of these tokens at the TGE last cycle was 13%.
Additional information: There is also a widely circulated image in the same Binance Research article, claiming that the average circulation of tokens launched in 2022 at the time of launch is 41%.
Sorry - what? My brother, I was in the industry in 2022 and there was not 41% of the circulating supply when the project launched.
I extracted the coin listing information of Binance in 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.
Spot checking a few of them, as these tokens don’t all have data in TokenUnlocks: IMX, OP, and APE are similar to the latest batch of tokens we’re comparing, with IMX having a 10% circulation on day one, APE having a 27% circulation on day one (but 10% of that is the APE treasury, so I rounded it up to 17% circulation), and OP having a 5% circulation on day one.
On the other hand, there is LDO (55% unlocked) and OSMO (46% unlocked), but they were listed over a year before Binance, so it would be silly to compare those listings to the latest day one listings. If I had to guess, these non-Binance first listings plus random enterprise tokens like NEXO or ALPINE are the reason they get such crazy high numbers. I don't think they are the real trend of TGEs - they represent the trend of tokens that Binance lists every year.
OK, maybe you'll admit that 13% of circulating supply is similar to past cycles. But that's still too little for price discovery to occur, right? The stock market doesn't have this problem.
After all, just look at the median float on the first day of a 2023 IPO. Check the stock data. 12.8%. (H T@0xdoug)
But seriously, extremely low circulating supply is definitely a problem. WLD is a particularly egregious example, with just 2% circulating supply. FIL and ICP also had extremely low circulating supply at launch, which made for very ugly price charts. But most of the tokens in the Binance chart group had a circulating supply within the historically normal range on the first day.
Also, if this theory is correct, you should see the lowest circulating supply coins get penalized, while higher circulating supply coins should do well. But we don’t see a strong correlation. They all go down.
So this lack of price discovery story sounds compelling, but after looking at the data, I’m not convinced.
Solutions, Solutions
Everyone complains, but a few people have come up with practical solutions! Before we discuss the null hypothesis, let’s review them.
Many people are suggesting bringing back ICOs. Sorry - don't we remember the days when ICOs were dumped and retail investors were buried after listing? And ICOs are illegal almost everywhere, so I don't think this is a serious suggestion.
Kyle Samani, managing partner at Multicoin, believes that VCs and teams should unlock 100% immediately — which is impossible for US investors under 144a rules (and would also add fuel to the “VC dumping” theory). Also, I think we learned in 2017 why team vesting is a good idea.
Arca believes that tokens should have bookrunners like traditional IPOs. I mean, maybe? Token issuance is more like a direct listing, which is a listing on an exchange with some market makers, and that's it. I think it's great, but I prefer a simple market structure and fewer intermediaries.
Lattice Fund’s Reganbozman suggests that project tokens should be listed at a lower price so that retail investors can buy in earlier and win some upside. I get the spirit, but I don’t think it works. Artificially lowering the price below the market clearing price means that whoever trades in the first minute of trading on Binance will capture the mispricing. We’ve seen this happen multiple times with NFT minting and IDOs. Artificially lowering the listing price only benefits the few traders who fill their orders in the first 10 minutes. If the market thinks you’re worth X, then in a free market you’ll be worth X by the end of the day.
Some people suggest going back to fair launches. Fair launches sound good in theory, but don’t work well in practice because teams bounce. Trust me, everyone tried this during DeFi Summer. There aren’t many success stories here — what other non-meme coins have had successful fair launches in the past few years besides Yearn?
Many people have suggested that teams do larger airdrops. I think that argument makes a lot of sense! We generally encourage teams to try to provide more supply on day one to improve decentralization and price discovery. That said, I don’t think it’s smart to do ridiculously large airdrops just for liquidity — a protocol needs to do a lot with its token to be successful after day one, and burdening yourself with it on day one just to get ahead. Huge circulation is not a smart move when you’re competing for token funding in the future. You don’t want to be one of those coins that has to re-increase its token supply a few years later because the coffers are empty.
So what do we as VC investors want to see happen here? Believe it or not, the token price in the first year reflects reality. We are not paid on profits, but on DPI (Distributed to Paid in Capital), which means we have to convert tokens into cash eventually. We can't eat paper profits, and we don't mark unvested tokens to market valuation (anyone who does this is crazy in my opinion). It is actually a bad performance for VCs to reach astronomical valuations and then get stuck after we unlock. It makes LPs think that this asset class is fake - it looks good on paper, but it is terrible in reality. We don't want this. We want asset prices to rise gradually and steadily over time, which is what most people want.
So, are these high FDVs sustainable? I don’t know. These numbers are obviously eye-popping compared to the numbers when projects like ETH, SOL, NEAR, and AVAX were first launched. But cryptocurrencies are definitely much bigger now, and the market potential for successful crypto protocols is clearly larger than it was in the past.
An important point 0xdoug made is that if you normalize last year’s altcoin FDV to today’s ETH price, you get a number very close to the FDV we are currently seeing. Cobie also echoed this in his recent post. We will not go back to $40M FDV for L1 public chain tokens because everyone sees how big the market is now. But when SOL and AVAX are launched, retail investors can pay prices comparable to ETH adjusted.
A lot of this frustration can be attributed to this: Cryptocurrencies have risen dramatically over the past 5 years. Startups are priced based on comparable companies, so numbers like FDV are larger. That's it.
OK, so it's easy for me to criticize other people's solutions. But what is my clever solution?
The honest answer?
No.
The free market will sort this out on its own. If the token goes down, then other tokens will re-price at a lower price, exchanges will push teams to launch at a lower FDV, buried traders will just buy at a lower price, and VCs will pass this information on to founders. Series B will be priced lower due to public market comparisons, which will punish Series A investors and eventually seed investors. Price signals always propagate in the end.
When there is a true market failure, you may need some kind of clever market intervention. But the free market knows how to fix pricing errors - just change the price. Those who lost money, whether VC or retail, didn't need people like me to express their thoughts or debate on Twitter. They have internalized this lesson and are willing to pay less for these tokens. That's why all of these tokens are trading at a lower FDV, and future token transactions will be priced accordingly.
This has happened many times before. It only takes a minute.
4) Null Hypothesis
Now let’s demystify the situation. What happened in April that caused all the tokens to drop?
The culprit: the Middle East.
For the first few months, trading of these tokens was mostly flat since listing until mid-April. Iran and Israel suddenly began threatening World War III and the market plummeted. Bitcoin later recovered, but these tokens did not.
So what is the best explanation for why these tokens are still down? My explanation is this: these new projects are all psychologically categorized as “risky new coins.” Interest in the “risky basket of new coins” dropped in April and has not recovered. Market players decided they didn’t want to buy them back.
Why? I don’t know. Markets can be fickle at times. But if this basket of “risk new tokens” had gone up 50% during this period, instead of down 50%, would you still be arguing about how token market structure is broken? That would also be a mispricing, just in the opposite direction.
A mispricing is a mispricing and the market will eventually fix it. If you want to help - sell things at crazy prices and buy things at better prices. If the market is wrong, it will fix itself. No need to do anything else.
do what?
When people lose money, everyone wants to know who to blame. Is it the founder? The VC? The KOL? The exchange? The market maker? The trader?
I think the best answer is no one. (I’d also accept the answer is everyone.) But thinking about market mispricing in terms of blame is not a productive framework. So I’m going to frame this in terms of what people can do better in this new market structure.
VC: Listen to the market and slow down. Show price discipline. Encourage founders to be realistic about valuations. Don’t mark your lockup to market price (almost all the top VCs I know hold lockups at a significant discount to market price). If you find yourself thinking “there’s no way I can lose money on this deal”, you’re probably going to regret the deal.
Exchanges: List tokens at lower prices. But you already knew that. Consider using public auctions to price day one tokens, rather than pricing as a function of the last VC round. Don’t list tokens unless all investors/teams have a contractual obligation not to hedge, and unless everyone (including KOLs) has a market standard lock-up. Do a better job showing retail investors the FDV progress chart we all know and love, and educate them more about unlocks.
Team: Try to provide more tokens on day one! Less than 10% of token supply is too low.
Of course, have healthy airdrops and don't be too afraid of a low FDV on the first day of listing. The best price chart to build a healthy community is a gradual upward grind.
If your team’s token has gone down, don’t worry. Remember:
AVAX’s price fell by about 24% in the two months since its listing.
The price of SOL fell by about 35% in the two months after its listing.
NEAR’s price fell by about 47% in two months after its listing.
You'll be fine. Focus on building something to be proud of and keep delivering. The market will eventually figure it out.
For your part, be careful of single cause-and-effect explanations. Markets are complicated, and sometimes they just go down. Be skeptical of anyone who claims to confidently know why.
DYOR, don't invest in anything you are not prepared to lose.
