In recent times, the cryptocurrency market has seen a pattern where tokens are introduced with substantial fully diluted valuations (FDVs) but relatively low initial circulating supplies.
This setup, often influenced by venture capital (VC) funding and optimistic market sentiment, can lead to unsustainable price surges following token generation events (TGEs) and significant selling pressure once tokens become available.
According to a recent report from Binance Research, data compiled from Token Unlocks and CoinMarketCap suggests that around $155 billion worth of tokens will be unlocked between 2024 and 2030. Binance Research warns that without a surge in demand from buyers, these unlocks could exert considerable downward pressure on token prices. Tokens launched in 2024 have exhibited the lowest market capitalization (MC) to FDV ratios in recent years, indicating the prevalence of low circulating supplies at launch.
The MC/FDV ratio for tokens introduced in 2024 stands at just 12.3%, indicating a significant volume of tokens that will unlock in the future.
The influx of capital from private markets has heavily influenced cryptocurrency market valuations. Since 2017, over $91 billion has been injected into crypto projects, boosting token prices even prior to public market launches. In Q1 2024, crypto deal-making activity surged by 52.1% quarter-on-quarter (QoQ), signaling a strong willingness among investors to finance projects at elevated valuations.
Notably, the cryptocurrency market capitalization also soared by 61% in the same period, fostering positive investor sentiment and enabling projects to raise substantial funds with less dilution.
However, this trend presents long-term risks associated with inflated valuations, as outlined in the research report. Many new tokens possess FDVs comparable to established layer-1 or DeFi tokens, despite lacking similar user engagement and market recognition. This disparity suggests a misalignment between valuations and actual market demand.
In response, Binance Research advises investors to prioritize project fundamentals such as tokenomics, valuation, product feasibility, and team expertise. Understanding token unlock schedules and conducting thorough due diligence are crucial steps to avoid the risks associated with high FDV tokens, according to the report.
Furthermore, projects are encouraged to adopt a long-term approach in designing tokenomics, ensuring fair token distributions and considering the implications of high FDVs and low circulating supplies. Strategies like token burning, milestone-based vesting, and increasing initial circulating supply can help mitigate future selling pressures.
Launching tokens with low circulating supplies and high FDVs presents significant challenges for sustainable growth. Both investors and project teams need to consider the long-term consequences of their decisions. VC-backed projects should focus on fair supply distributions and realistic valuations to foster a healthier market environment.
May 2024, Cryptoniteuae