Recent market comments:
Recently, US President Biden vetoed the previous proposal to repeal SAB 121, which had a negative impact on the cryptocurrency market. Due to the ETH ETF, the market is still tepid. The view that we previously estimated that Biden might agree with has also reversed, which also makes everyone need to re-evaluate the Biden team's policy on cryptocurrency. We noticed that the reason Biden gave was to protect consumers, so the following will mainly focus on this. Right and wrong are no longer important, and the position can determine everything.
How is high FDV generated?
Today we are mainly discussing high FDV projects. We can simply understand FDV as the total valuation of the project or the valuation after full dilution. That is, the product of the token price and the total number of tokens, including locked tokens. High FDV is a hot topic this year. The reason is that many project parties generally give high valuations when financing projects. This is particularly obvious this year. Most financing valuations are around hundreds of millions or even billions, which makes the initial price of the project high when it is listed, with little room for growth and a large room for decline. Uninformed investors who buy after the opening are easily trapped, and the price of the currency continues to fall after the opening, which affects investor enthusiasm and makes the market cold.
Currently, high FDV has been intensifying. Except for some projects that have been listed, most high FDV projects have not actually been listed yet. Here we believe that the project owners may also think that the coin price is difficult to maintain under high FDV, so they try to delay it until the market is hot.
Some people say that although we are in the early stages of a bull market, people have little motivation to buy, which is to a certain extent caused by the high FDV. Although this is not comprehensive, it is also an important factor.
The dangers of high FDV and why organizations do this
The biggest harm of high FDV is that it weakens retail investors' fantasies and expectations about the project. Because the project reaches its peak at its debut, it is difficult for retail investors to see how the FDV can increase from hundreds of millions to billions. This is a difficult thing in itself. Similarly, for institutions, they also need certain withdrawal skills, otherwise they may leave the chips in their hands and find it difficult to obtain substantial benefits. There is even the risk of being cut by the project party.
So why do organizations continue to join high FDV projects?
A very important reason is that institutions are too optimistic about the market, which makes them still have expectations for some projects. At the same time, they are willing to use the resources at their disposal to help projects quickly develop into market hits. In other words, everything is under control, so even with a high FDV, institutions can see opportunities.
Another factor is that for some outstanding projects, investment institutions may not prioritize return on investment, but rather consider investment channels and opportunities for large funds.
In simple terms, for example, if you have 1,000 yuan, you take out 100 yuan to invest in a project with a return rate of 10 times, but there is still 900 yuan lying in the account. At this time, you have a popular high FDV project with a return rate of 2 times. At this time, you may choose to take out 1,000 yuan and bet all on this high FDV project. If the former project is realized, you will earn 900 yuan, and if the latter project is realized, you will earn 1,900 yuan. In comparison, the high FDV project will naturally earn more.
I believe many people have noticed that there are two key factors here, which are: 1. There are not many good projects in the market, which makes it easy to achieve high FDV. 2. Institutions have a lot of money, so they prefer some high-quality projects. Even if its FDV is high, it can still make a lot of money by earning low returns with large funds, and its liquidity will also be very good.
On the contrary, if you bet all on the first project, there is a possibility that the market liquidity is not deep when it is listed, and a small amount of your sales will have a great impact on the currency price. In this way, even if the price goes up, by the time you have sold most of it, it may only be about six or seven times the value. Sometimes there is even the risk of not being able to sell all of it and having it stuck with the stock.
In other words, high FDV is an important channel for large funds to participate in initial investment in the cryptocurrency circle.
Some other high FDV institutional investments may be equity rather than currency rights. Of course, they may also be given currency rights later, which makes this investment still very valuable, because the essence of equity is to invest in the project party, and many will also be given currency rights when they obtain equity. In this way, even if the institution sells the currency at a low price after listing, the equity still generates a certain value (the income obtained by the project). Therefore, in general, the valuation of the project and the team will increase a lot, which makes it easy to be regarded as a high-valued project. Retail investors generally trade currency rights, but not equity, so it gives people the illusion that the project party is cutting leeks.
In addition, some project founders will also sign a bet agreement with the institution, for example, the project party will make up for the losses of the institution. In this way, it is actually a good deal for the project party.
How to treat retail investors?
For retail investors, high FDV is indeed a bad thing, but there is still room for reversal. Retail investors should pay more attention to the specific situation of the project token when it is listed, and focus on the following aspects:
Circulating Market Value and Unlocking
Most high FDVs have low circulation, that is, the circulating market value is very low, so they can maintain high FDV. If a project has a high initial circulation and a high FDV, then it should basically not be considered. The same is true for unlocking. At least for retail investors, project tokens cannot be unlocked significantly in a bull market, so as to protect the rights and interests of retail investors.
Availability
It is not a good thing for high FDV projects to list tokens in the early stage of the bull market. High FDV projects should focus more on listing and trading in the middle and late stages of the bull market. In this way, the FDV of many projects in the market may be relatively high. At this time, for investors, they have certain advantages over the previous projects with high growth rates. At this time, retail investors are also willing to give a higher valuation, and such prices are more acceptable. In the early stage of the bull market, we should look for potential projects. Obviously, high FDV projects themselves are not potential projects.
Project Token Economic Model Destruction Deflation
It is difficult for high FDV to support the price of coins to a certain extent, so a better economic model is needed here, otherwise the value of the coin will be distorted. The most common thing is that there needs to be a certain degree of deflation and token destruction measures. Only the destruction of tokens can increase the value of tokens in the hands of investors and gradually return to the value range to make up for the previous high valuation. If the project team does not set up a promising token model and destruction measures, it will be difficult to support its price.
Summarize
We believe that the emergence of high FDV is mainly a reflection of the investment institutions' demand for high-quality projects. Although the market also needs high-quality projects to support the development of the industry, it still needs to leave a certain amount of growth space for retail investors. Otherwise, this can only be called a game of capital, and it will eventually be easily abandoned by retail investors. Therefore, for project parties and institutions, balanced development is the key factor, not short-term high returns. Otherwise, even if the FDV is forcibly increased, it will be difficult to gain market recognition and investor buy-in.
