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The crypto market has recently witnessed a trend of tokens launching with high fully diluted valuations (FDVs) but low initial circulating supplies.
This structure, often driven by venture capital (VC) funding and upbeat market sentiment, can lead to unsustainable price appreciation post-token generation event (TGE) and significant selling pressure once tokens unlock.
According to a recently released report from Binance Research, aggregated data from Token Unlocks and CoinMarketCap indicate that approximately $155 billion worth of tokens will unlock between 2024 and 2030.
Binance Research suggests that without increased buy-side demand, these unlocks could exert substantial downward pressure on token prices. Tokens launched in 2024 have shown the lowest market capitalization (MC) to FDV ratios in recent years, highlighting the prevalence of low circulating supplies at launch.
The MC/FDV ratio for tokens launched in 2024 is just 12.3%, suggesting that a significant value of tokens will be unlocked in the future.
The influx of private market capital has significantly shaped crypto market valuations. Since 2017, over $91 billion has been invested in crypto projects, driving up token prices even before public market launches. In Q1 2024, crypto deal-making activity rose by 52.1% QoQ, indicating a strong willingness among investors to fund projects at elevated valuations.
Notably, the crypto market capitalization also increased by 61% in the same period, fueling positive investor sentiment and allowing projects to raise substantial capital with less dilution.
This trend poses long-term risks associated with inflated valuations, the research report claims. Many new tokens have FDVs comparable to established layer-1 or DeFi tokens, despite lacking similar user traction and market presence. This discrepancy suggests a misalignment in valuations and actual market demand.
On this end, Binance Research advised investors to emphasize project fundamentals such as tokenomics, valuation, product viability, and team credentials. By extension, a basic understanding of unlock schedules work, paired with thorough due diligence would be crucial to avoid the pitfalls of high FDV tokens, the paper suggests.
“Tokenomics is undoubtedly one of the most important considerations for investors and project teams. Every design decision comes with its set of benefits and trade-offs. While launching tokens with low initial circulating supply may drive initial price pumps, the steady unlocking and emission of tokens create selling pressure, weighing on long-term performance,” the report states.
Projects, on the other hand, should adopt long-term thinking in tokenomics design, ensuring equitable token distributions and considering the implications of high FDVs and low floats. Strategies such as token burning, milestone-based vesting, and increasing initial circulating supply can help mitigate future selling pressures.
The trend of launching tokens with low floats and high FDVs poses significant challenges for sustainable growth. Both investors and project teams need to be mindful of the long-term implications of their decisions, Binance Research said. VC-backed projects should focus on equitable supply distributions and realistic valuations to foster a healthier market environment.
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