In the field of cryptocurrency, many venture capital projects not only have liquidity in the spot market but have also developed active derivatives markets. This is why cryptocurrency venture investments have become a distinct asset class. The article is sourced from José Maria Macedo and compiled, translated, and written by Deep Tide.
(Background:
Metal fans flood Solana! Top band “Metallica” hacked, memecoin METAL surges 6000%
)
(Additional context:
The meme coin frenzy continues: but don’t marry your Memecoin, beware of playing with fire
)
FDV is definitely not a meme. Since this article was published, I’ve been in discussions with over-the-counter brokers, trying to understand the secondary market structure for assets I’m shorting. The findings have been enlightening, so I’d like to share them.
In summary, I don’t believe these will be bullish unlocks.
Many of these assets have active sellers, but there’s little demand below 70% of market price (we’re talking about standard SAFT, or Simple Agreement for Future Tokens, with a one-year cliff and two to three-year vesting).
In terms of trading volume, based on rough estimates from conversations with different brokers, total SAFT trading volume is around $100 million. Considering these assets will unlock accumulated unrealized gains worth billions over the next few years, this is essentially where the dust settles.
To put it plainly, “bullish unlocks” hope to see as low a ratio of unrealized gain market value as possible, as explained in the linked article.
Most tokens sit on significant unrealized gains from teams (0 cost basis) and early investors (you can calculate this yourself using tools like cryptorank.io). Coupled with very low float rates (typically 5-15%), most projects trade at 4-8 times their unrealized gain market value, meaning the entire circulating market value of projects has 4-8 times the unrealized gains.
Assuming from Cliff Day, this means assets worth the entire market value unlock every 3-6 months over a two-year period. This makes it challenging to attract buyers, especially when their alternative beta positions are in memecoins and other assets without oversupply.
One way to mitigate this impact (besides increasing initial float) is high pre-issuance secondary trading volume, ideally as close to current market price as possible. This helps reset the cost basis of unlocking tokens and fundamentally reduces the unrealized gain market value ratio (e.g., the now famous Multicoin SOL sidecar that led to the first unlock).
Unfortunately, I haven’t seen this scenario in the OTC market. In connection with this, I’m working to understand market structure. I don’t want to single out specific assets, but many assets exhibit:
– Extremely high unrealized gain market value ratios.
– No secondary demand even at discounts around 70% from market price.
– Positive funding rates on Binance, with open interest reaching eight figures.
Who would covet these on CEXs yet show little interest in buying secondary market at discounts above 70%?
My hypothesis is simply that there’s friction on both sides of the market. I don’t have much insight into buyers, but if they’re spending money to long these, they’re likely retail gamblers who don’t understand vesting schedules or the immaturity of OTC platforms.
Sellers may include:
– Founders/teams with over 90% of new coins locked in token bags, hence no collateral or inclination to short.
– Investors in venture capital funds who cannot or do not have setups to short assets on CEXs.
That’s why there’s still an opportunity to short these assets and profit from them.
By the way, contrary to what doomsayers in CT might tell you, this doesn’t mean all cryptocurrencies are scams or that all assets with high unrealized gain market values will go to zero.
I’m very bullish on cryptocurrencies and believe some categories will rise through their unlocks because they have genuine applications.
However, there will also be tail assets that go to zero. This is natural and expected in an asset class that provides liquidity for early-stage venture investments. After all, most venture investments fail. In traditional venture capital, only a very few elite companies go public and achieve liquidity, while tail projects quietly fail.
In cryptocurrency, a higher proportion of venture capital projects ultimately not only have spot liquidity but also liquid derivatives markets. This is unheard of in traditional venture capital and is why cryptocurrency venture investments have become a unique asset class.
It also means the long tail failures of cryptocurrency venture investments will be public and painful, where traders will either profit greatly or lose substantial sums of money, rather than quietly fading away.
This also implies there are more structural shorting opportunities in cryptocurrency than in any other asset class. In a way, you’re essentially betting on the undeniable fact that most startups fail.
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