Authors: JieXuan Chua, Brian Chen, Binance Research

Translation: 0xjx, Jinse Finance

I. Key Points of This Article

  • In recent months, the hot topic in the crypto community has been tokens with high valuations and low initial circulation. This market structure has raised concerns about the limited sustainable upside for traders post-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. If buyer demand and capital inflows do not increase correspondingly, this large influx of tokens into the market will create selling pressure.
  • Factors such as private market capital inflows, aggressive valuations, and optimistic market sentiment have contributed to the trend of tokens being issued with high fully diluted valuations (FDV).
  • The current market conditions require investors to be more selective and prudent, considering fundamental aspects of projects such as tokenomics, valuation, and product. Project teams may also need to consider the long-term impacts related to tokenomics design.
  • VCs continue to play a crucial role in our industry and can collaborate with project teams to ensure fair supply distribution and reasonable valuations.

II. Market Observations

In recent months, the hot topic in the crypto community has been tokens with high valuations and low initial circulation. This market structure has raised concerns about the limited sustainable upside for traders post-TGE.

These concerns are not unfounded. It has become common for tokens to be issued with low circulation, with most tokens scheduled for future release. Under bull market conditions, these tokens may see rapid price increases due to limited liquidity available for trading at issuance. However, it is clear that such price growth is unsustainable when a wave of token supply unlocks.

Additionally, the FDV of newly issued tokens being comparable to established Layer 1 or DeFi tokens with proven user traction has also drawn attention. Overall, market participants are now aware of the impact of low circulation and high FDV tokens.

In this report, we will explore this market trend in more detail. We will first provide a detailed overview of our observations on the increasing issuance of high FDV tokens and discuss the potential market impacts and their significance. Then, we will analyze the underlying causes of this trend, particularly the possible contributing factor of private market activity. Finally, we will offer some recommendations to identify and mitigate the negative impacts of this trend, with a focus on tailored advice for investors and project teams.

2.1 Low Circulation, High FDV

There is a clear trend of recently issued tokens being released with high valuations and low circulation. This is particularly evident when comparing tokens issued over the past few years—the market cap (MC) to FDV ratio of tokens issued in 2024 is the lowest. This indicates a large number of tokens will be unlocked in the future.

Figure 1: The MC/FDV of 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 cap and FDV of tokens issued over the past three years, highlighting the widening gap between these metrics over time. Notably, despite 2024 just beginning, the FDV of tokens issued in these few months is already approaching the total for 2023, underscoring the prevalence of high-valuation tokens.

The MC/FDV of tokens issued in 2024 is 12.3%, indicating a large number of tokens will enter circulation in the future. This also means that to maintain the current prices of these tokens over the coming years, approximately $8 billion in demand-side liquidity needs to flow into these tokens to match the increase in supply. Although market cycles may vary, this may not be an easy task.

Examining some recently issued tokens reveals the underlying reasons for the high FDV in 2024. Figure 2 shows several tokens issued in recent months and their percentages of circulating and locked supply. Circulating supply is as low as 6%, not exceeding 20%, making the root cause evident.

Figure 2: Recently issued tokens have extremely low circulating supply

Source: CoinMarketCap, Binance Research, as of May 14, 2024

For the same level of demand, low circulating supply contributes to higher initial token prices, thereby driving higher FDV.

Comparing the peak FDV of the same set of tokens with the median FDV of the top ten tokens in the market (excluding BTC, ETH, and stablecoins) provides a sense of the relative valuation of recently listed tokens. At their peaks, some tokens' valuations are similar to the largest tokens in the market, which have been around for years.

Figure 3: At their peaks, some recently issued tokens' valuations are similar to the largest tokens in the market

Source: CoinMarketCap, Binance Research, as of May 14, 2024

It is important to note that FDV alone does not provide a complete picture; they are less meaningful than FDV ratios (e.g., FDV/Total Value Locked, FDV/Revenue, etc.) because these ratios take operational metrics into account.

In recent months, many projects have issued their tokens, many of which have low circulation and high FDV. Due to the large number of such projects, we have only selected a few for illustration. Please note that this is merely 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 many other factors are at play.

2.2 Market Impact and Significance

The issuance of low-circulation tokens has impacted market dynamics, particularly by increasing selling pressure. According to Token Unlocks' report, approximately $155 billion worth of tokens are expected to be unlocked from 2024 to 2030.

Although this figure is an estimate, its significance is clear—an expected large supply of tokens will be released in the coming years, and without corresponding capital inflows, many tokens will face significant selling pressure.

Given this, understanding and tracking token unlock schedules is crucial for investors to avoid being caught off guard during large-scale token unlocks.

Figure 4: $155 billion worth of tokens will be unlocked in the coming years

Source: Token Unlocks, Binance Research, as of May 14, 2023

A related observation is that Meme tokens have outperformed other tokens so far this year. Besides significant recognition and strong speculative demand, their token supply structure has also played a role in this year's rally.

Figure 5: Meme tokens have been the best-performing theme so far this year

Source: Dune Analytics (@cryptokoryo_research), as of May 14, 2024

Most Meme tokens were unlocked and circulating at TGE, eliminating the selling pressure from future dilution. Many had an MC/FDV ratio of 1 at issuance, meaning holders would not face further dilution from token issuance. This structure has played a role in the appeal of Meme tokens, especially given the increased awareness of the impact of large-scale token unlocks. While the success of Meme tokens should not be entirely attributed to dissatisfaction with low-circulation 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 view Meme tokens as a means to counter the advantages institutions gain in private rounds. This is because Meme tokens are typically issued in a manner open to anyone, with little opportunity for institutional participants to acquire tokens at low prices in advance. Therefore, Meme tokens have become an important theme in the current market, continuously attracting significant trading volume and strong price volatility.

III. How Did We Get Here?

High valuations, coupled with ongoing selling pressure from token unlocks, pose a structural negative impact on token prices. However, as observed in the previous section, this situation has become more common in recent years. Several factors have contributed to this situation.

3.1 Influx of Private Market Capital

VC funds have increasingly become key players in the crypto investment space. Despite the natural fluctuations in investment capital due to market cycles, VC capital inflows into the crypto space have been steadily rising since 2017. Since 2017, total VC funding into crypto projects has exceeded $91 billion, demonstrating the role of VCs in providing project funding.

The importance of providing necessary funding.

Figure 6: Cumulative VC funding since 2017 has exceeded $91 billion

Source: The Block, Binance Research, as of May 13, 2024

However, the significant increase in investment has also led to a corresponding rise in the influence of VCs in shaping crypto market valuations. As more funds flow into this sector and VCs participate in more deals, they essentially drive up valuations.

As a result, when tokens are launched on the public market, their prices and valuations are already elevated. In fact, large-scale private market fundraising leads to tokens reaching valuations of billions of dollars at launch, making it more difficult for public market investors to profit from future growth.

3.2 Aggressive Valuations

This year's strong market performance has fueled market sentiment and driven more aggressive trading activity. This has led some investors to be more willing to invest at higher valuations.

Given that valuations in the millions of dollars have become the norm, being cautious about valuations may actually put VCs at a disadvantage in front of their LPs, as it means missing out on most deals when trading activity is high. Although market activity is still below the peak of 2022, the number of crypto deals in the first quarter of 2024 increased by 52.1% quarter-on-quarter, reaching the highest level in nearly two years.

Figure 7: Increased trading activity this year

Moreover, in a bull market, VCs are motivated to continue deploying capital. As long as the music keeps playing, high valuations will boost VC performance metrics. Additionally, for projects, raising large amounts of capital at high valuations is beneficial as it provides operational funds without significant dilution. This also demonstrates strong support from "smart money."

Overall, raising funds at high valuations in private rounds means stakeholders are incentivized to publicly release tokens at higher fully diluted valuations (FDV).

3.3 Optimistic Market Sentiment

With the crypto market capitalization growing by 61% in the first quarter of this year, market sentiment during this period was clearly very positive. CoinMarketCap's Fear and Greed Index was in the "Greed" and "Extreme Greed" range for 69 out of the 91 days in the first quarter. Accordingly, project teams were able to leverage this positive investor sentiment to raise funds at higher valuations in the first quarter.

This is evident from the increase in valuations in the first quarter. Specifically, the pre-money valuations of VC-backed crypto companies rebounded by more than 70% quarter-on-quarter in the first quarter of 2024. This indicates that, on average, projects were able to raise the same amount of funds with less dilution compared to the previous quarter.

Figure 8: Pre-money valuation rebound in the first quarter of 2024

4. Some Thoughts

4.1 For Investors: Fundamentals Matter

The current market structure makes it more necessary for investors to be selective. Given that many projects start with high valuations, the probability of "speculating" on new tokens for 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 private rounds or during the token generation event (TGE), investors should conduct thorough due diligence and establish their own investment processes. Some fundamental metrics and aspects worth paying attention to include but are not limited to:

  • Tokenomics: The importance of unlock schedules and periods cannot be underestimated as they directly affect the token supply in the market. Without a corresponding increase in demand, it can lead to excessive selling pressure on the token price.
  • Valuation: FDV provides a rough sense of scale but is not very meaningful on its own. Evaluate valuations relative to other competitors and over time (e.g., FDV/revenue, FDV/total value locked, etc.).
  • Product: Consider the project's position in the product lifecycle (e.g., whitepaper stage or product already live on the mainnet). Is there product-market fit? Observe user activity (e.g., number of daily active addresses, daily transaction volume, etc.).
  • People: This includes the team and community. What is the background of the founders, and how do they contribute to the project? How engaged is the community, and what excites them most about the project?

Rather than actively chasing the next shiny token, 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 good until the music stops. Avoid being the last holder.

4.2 For Project Teams: Consider Long-Term Development

Running a project is not easy, given the numerous aspects and stakeholders to consider. Decision-making is complex and cannot satisfy everyone. Nevertheless, we believe one of the guiding principles for decision-making is to consider long-term development.

  • Tokenomics: Launching tokens with low circulation and high FDV may help initial price increases due to limited token supply. However, subsequent unlocks can create significant selling pressure on the token. Loyal token holders (arguably one of the most important groups in the community) will suffer as a result. Poor token performance may also deter new ecosystem participants from joining the network as incentives decrease.

In this regard, token allocation, unlock, and vesting schedules should be carefully considered. Although tokenomics is more of an art than a science, with no magical numbers or methods, it is clear that recently launched tokens have very low circulation, as shown in Figure 2. To mitigate the risk of sudden supply increases, teams and investors can consider token burn mechanisms, aligning vesting schedules with set milestones, and increasing initial circulating supply during TGE.

  • Product: While tokens can help gain market attention and serve as a great user acquisition tool, a viable product is key to creating value, user retention, and sustainable growth. Having at least a minimum viable product before 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 appeal can facilitate a successful TGE by boosting confidence and attracting high-quality investors and users. In the long run, the product adds intrinsic value to the token and helps with token price performance.

With the rebound in fundraising activity in the first quarter, project founders can leverage the rising sentiment to achieve higher valuations. However, while it intuitively makes sense to raise funds at high valuations (who would refuse to raise the same amount of funds with less dilution?), it comes with long-term implications. Projects raising funds at prices significantly above intrinsic value will need to justify this premium in future private rounds or on the public market. If they fail to do so, token prices may trend towards their true value. Investors will suffer losses, and project teams may find it difficult to reverse community sentiment.

5. Conclusion

Tokenomics is undoubtedly one of the most important considerations for both investors and project teams. Every design decision comes with a set of benefits and trade-offs. While launching tokens with low initial circulating supply may drive initial price increases, the steady unlocking and issuance of tokens will create selling pressure, impacting long-term performance. If such a trend becomes the industry norm, the unlocking of billions of tokens in the coming years will make sustainable growth increasingly difficult unless corresponding capital inflows can match these unlocks.

VCs continue to play a crucial role in our industry, and VC-backed tokens are not inherently bad. Project teams and VCs should work together to ensure fair and reasonable supply distribution and valuation.