Recently, a widely circulated table describing the poor performance of a batch of coins listed on Binance has sparked a lot of discussion. This article is sourced from a tweet by Haseeb Qureshi, a managing partner at the well-known VC firm Drangonfly, and has been compiled, translated, and written by Deep Flow.
Table of Contents:
VC / KOL Selling to Retail Investors
Retail Investors Abandoning These Tokens in Favor of Meme Tokens
The Problem Lies in Asset Prices, Not Trading Volume
Insufficient Supply for Meaningful Price Discovery
Solution
Original Hypothesis
What Should We Do?
Has the Market Structure Been Broken? Are VCs Being Too Greedy? Is This a Manipulative Game Targeting Retail Investors? Most of the theories I have seen about this seem to be wrong. But I will let the data speak.
Here is a widely circulated table provided by @tradetheflow_, showing the poor performance of a batch of coins recently listed on Binance. Most of these coins are mocked as “high FDV, low circulation” tokens, meaning they have a huge fully diluted valuation (FDV) but very low initial circulation.
I have plotted all these charts and removed the labels. I have excluded any obvious memes and tokens that had token generation events (TGEs) before listing on Binance, such as RON and AXL. Here is what it looks like, with BTC (beta) represented in yellow.
These “low circulation, high FDV” Binance-listed coins have almost all declined. What is the reason for this? Everyone has their own theories about the market structure issues, and the most popular three are:
1. VCs/KOLs selling to retail investors
2. Retail investors abandoning these tokens in favor of meme tokens
3. Insufficient supply for meaningful price discovery
All of these are reasonable theories, so let’s see if they hold true. To conduct scientific research, we need a null hypothesis to test against. In this case, our null hypothesis should be that these assets have been repriced but without deeper market structure issues (classic “more sellers than buyers” scenario). We will discuss each theory one by one.
If this is true, what would we expect to see? We should see tokens with shorter lockup periods being sold off faster, while projects with longer lockup periods or no KOLs should perform well. (Perpetual contracts might be another way for selling off)
So, what does the data show?
From listing to early April, these tokens actually performed well, with some prices above the listing price and some below, but most concentrated around zero. Prior to that, it seems no VCs or KOLs started selling.
Then, in mid-April, everything started declining simultaneously. Despite these projects listing on different dates and having many different VCs and KOLs, did all of these projects unlock and start selling to retail investors in mid-April?
Assuming I am a VC. There are definitely cases of VCs selling to retail investors. Some VCs have no lockup periods and they do OTC hedging, even violating the lockup period. But these are low-tier VCs, and most teams working with these VCs cannot list on top-tier exchanges. Every top-tier VC you can think of has at least a one-year vesting period and several years of lockup before getting tokens. For anyone regulated under Rule 144a by the SEC, the one-year waiting period is actually mandatory. And for large VCs like us, our positions are too large to hedge OTC, and we usually have contractual obligations not to do so.
So, the story doesn’t make sense for the following reasons: all these tokens are less than a year from their TGEs, meaning VCs with one-year lockups are still locked up!
Maybe some low-tier VC projects indeed sold tokens early, but all projects declined, even those from top-tier VCs within their unlock periods.
Therefore, the investor/KOL sell-off might be true for certain tokens — there will always be some projects with bad behavior. But if all tokens declined at the same time, this theory cannot explain it.
If this is true, we should see these newly listed tokens’ prices decline and retail investors turning to meme tokens.
However, what we see is:
I compared the trading volume of SHIB token with these tokens, and the issuance times don’t match. The meme frenzy peaked in March, but these tokens started declining in mid-April.
Here is the trading volume on Solana’s decentralized exchange (DEX), which tells the same story. The meme frenzy already erupted in early March, much earlier than mid-April. Therefore, this also doesn’t match the data. After these tokens declined, there was no widespread flow of funds into meme trading. People are trading memes, but they are also trading new tokens, and the trading volume doesn’t convey clear information.
In other words, the story many are trying to push that retail investors are disillusioned with real projects and now primarily interested in memes is not supported by the data.
This is the most common theory I have seen. It sounds reasonable! It’s not very attention-grabbing, which is a plus. Binance Research even published a nice report explaining the issue:
The average seems to be around 13%. This is obviously very low and apparently much lower than past tokens, right?
In the previous cycle, tokens had an average circulating supply of 13% at the time of issuance.
The same Binance Research article also has a chart that has been widely circulated on the internet, showing that tokens launched in 2022 had an average circulating supply of 41% at the time of listing.
I was there in 2022, and projects did not launch with 41% circulating supply.
I checked the Binance listings for 2022: OSMO, MAGIC, APT, GMX, STG, OP, LDO, MOB, NEXO, GAL, BSW, APE, KDA, GMT, ASTR, ALPINE, WOO, ANC, ACA, API3, LOKA, GLMR, ACH, IMX.
I randomly checked a few of them because they don’t all have data on TokenUnlocks: IMX, OP, and APE. IMX had a first-day circulating supply of 10%, APE had a first-day circulating supply of 27% (but 10% of it was from the APE treasury, so I rounded it to 17% circulating supply), and OP had a first-day circulating supply of 5%.
On the other hand, you have LDO (55% unlocked) and OSMO (46% unlocked), but these projects were already live a year before listing on Binance, so comparing them to the latest batch of listed projects is foolish. I guess these non-first-day listed tokens, along with random corporate tokens like NEXO or ALPINE, are the ones causing this crazy high figure. I don’t think they are determining the true trend of TGEs — they are determining the trend of what types of tokens Binance lists each year.
Okay, maybe you would concede that 13% circulating supply is similar to past cycles. But that still wouldn’t be enough for price discovery, right? The stock market doesn’t have this problem. The median circulating supply at IPO for stocks that went public in 2023 was 12.8%.
But honestly, having extremely low circulating supply is definitely a problem. WLD is a particularly severe case with only about 2% circulating supply. FIL and ICP also had very low circulating supply at listing, resulting in very poor price performance. But most of these Binance tokens are within the normal range for first-day circulation in history.
In conclusion — if something you are referring to has happened in the previous cycle, it cannot explain the unique phenomenon happening now.
Therefore, the story of “retail investors angrily exiting and turning to meme trading” sounds true and very catchy, but it cannot explain the data.
If this theory is correct, you should see that tokens with the lowest circulation are being punished, while tokens with higher circulation should perform well, but we haven’t seen a strong correlation, they are all falling.
Therefore, the argument of a lack of value discovery sounds persuasive, but after looking at the data, I don’t believe in this argument.
People keep complaining, but only a few offer practical solutions! Before we discuss hypotheticals, let’s first examine them.
Many people suggest reintroducing ICOs. Sorry – do we not remember how ICOs dumped after listing, causing retail investors to get burned? Besides, ICOs are illegal in almost everywhere, so I don’t think this is a serious suggestion.
@KyleSamani suggests unlocking 100% for investors and teams – according to the 144a provision, this is impossible for US investors (which would also exacerbate the “VC dump” problem). Moreover, I think we learned the benefits of team lockups in 2017.
@arca believes that tokens should have underwriters like traditional IPOs. I mean, maybe? Token listings might be more similar to direct listings, where they list on exchanges and have some market makers, that’s it. I think it’s good, but I lean towards a simpler market structure and fewer intermediaries.
@reganbozman suggests projects should list at a lower price so that retail investors can buy in earlier and get some upside. I understand the sentiment, but I don’t think it works. Artificially lowering the price below the market clearing price just means that in the first minute of trading on Binance, whoever can catch the mispricing benefits. We’ve seen this happen many times in NFT minting and IDOs. Artificially undervaluing your listing only benefits a few traders who blow through the order book in the first 10 minutes. If the market believes your value is X, in a free market, your value will be X at the very end.
Some suggest going back to fair launches. Fair launches sound good in theory, but they have not worked well in practice because teams will abandon them. Trust me, everyone tried this during the DeFi summer. In the past few years, besides Yearn, what non-meme fair launches have succeeded?
Many people suggest larger-scale airdrops by teams. I think that’s reasonable! We usually encourage teams to provide more supply on the first day to improve decentralization and value discovery. However, I don’t think it’s wise to do ridiculously large-scale airdrops just for the sake of increasing circulation – there’s a lot more to do for protocols after the first day. Releasing all token supply at once on listing day just for the sake of having a massive circulation is unwise because you’ll face competition in token grants in the future. You don’t want to be one of those tokens that have to increase token supply years later because the treasury ran out.
So as a VC, what do we want to see happen here? We want to see token prices reflect reality in the first year. Our returns don’t come from price appreciation, our returns come from DPI, which means we eventually have to liquidate our tokens. We can’t sustain ourselves on paper gains, and we won’t mark our locked tokens at market prices (anyone who does that is crazy in my opinion). For VCs, reaching astronomical valuations but then seeing a crash post-unlock is actually terrible. It makes LPs think this asset class is fake, looks good on paper but is actually bad. We don’t want that. We want asset prices to steadily rise over time, which is what most people want.
So are these high valuations sustainable in FDV? I don’t know. Compared to the initial prices of projects like ETH, SOL, NEAR, and AVAX, it’s obviously a staggering number. But the fact is, cryptocurrencies are larger now, and the market potential for successful crypto protocols is evidently much greater than before.
@0xdoug made a good point – if you standardize past altcoin token FDVs based on today’s ETH price, you get a number that is almost equivalent to the current FDVs we see. @Cobie also mentioned this in his recent post. We won’t go back to L1 FDVs of $40M because everyone sees how big the market is now. But when SOL and AVAX launched, the prices paid by retail investors were comparable to ETH-adjusted prices.
This frustration is largely attributed to the fact that cryptocurrencies have skyrocketed in the past five years. Startup pricing is based on comparables, so all digitals will get bigger. That’s just the reality.
Well, it’s easy for me to criticize other people’s solutions. But what’s my clever solution?
I don’t know either.
The free market will solve this situation itself. If tokens are falling, then other tokens will be repriced, exchanges will push teams to list at lower FDVs, and the burned traders will only buy tokens at lower prices, and venture capitalists will convey this information to founders. B-round prices will decrease due to public market comparisons, annoying A-round investors, and ultimately affecting seed investors. The price signal will eventually spread.
When there is a real market failure, you may need some clever market intervention. But the free market knows how to solve pricing errors – just change the price. Those who are losing money, whether they are venture capitalists or retail investors, don’t need people like me to write thought pieces or debate on Twitter. They have learned the lesson and are willing to pay lower prices for these tokens. That’s why all these tokens are trading at lower FDVs, and future token launches will be priced accordingly.
This has happened before, it just takes time.
Now let’s unveil the mystery and see what happened in April that caused all tokens to fall.
The culprit: Middle East issues.
In the past few months, these tokens mostly traded flat after listing until mid-April. Suddenly, Iran and Israel started threatening a third world war, and the market plummeted. Bitcoin bounced back, but these tokens did not.
So, what’s the best explanation for why these tokens are still falling? My explanation is that these new projects have all been mentally classified as “high-risk new tokens.” Interest in “high-risk new tokens” dropped in April and has not recovered; the market doesn’t want to buy them anymore.
Why? I don’t know. The market can be fickle sometimes. But if this basket of “high-risk new tokens” had gone up 50% during this period instead of down 50%, would you still argue that the token market structure is broken? It’s just a pricing error, but in the opposite direction.
The market will eventually correct pricing errors. If you want to help the market fix itself, sell at the highs and buy at the lows. If the market is wrong, it will self-correct. No need to do anything else.
When people lose money, everyone wants to know who to blame. Is it the founders? Venture capitalists? KOLs? Exchanges? Market makers? Traders? I think the best answer is no one. But it’s not an effective framework to think about pricing errors from the perspective of blame. So, I’ll elucidate this issue from the angle of what people can do better in the new market mechanisms.
Venture capitalists: Listen to the market, slow down, maintain price discipline. Encourage founders to have realistic valuations. Don’t mark your locked tokens at market prices (as far as I know, almost all top-tier VC firms hold their locked tokens at prices significantly lower than market prices). If you find yourself thinking “I can’t lose money on this trade,” you will likely regret that trade.
Exchanges: List tokens at lower prices. Consider pricing tokens on the first day through public auctions instead of relying on the previous round of VC pricing. Don’t list tokens unless everyone (including KOLs) has a market-standard lockup period. Don’t list tokens unless all investors/teams have contractual obligations not to hedge. Show retail investors better FDV countdown charts that we are all familiar with and provide them with more knowledge about unlocks.
Teams: Release more tokens on the first day, less than 10% of token supply is too low.
Of course, do healthy airdrops and don’t worry too much about undervaluation on the first day. Build a healthy community, and the best price chart is steady appreciation over time.
If the team’s token price falls, don’t worry. You’re not alone. Remember:
AVAX fell about 24% in the first 2 months after listing.
SOL fell about 35% in the first 2 months after listing.
NEAR fell about 47% in the first 2 months after listing.
You’ll be fine, focus on building something to be proud of and keep pushing forward. The market will eventually solve this problem.
For you, Anon: Be cautious of single-factor explanations. The market is complex, and sometimes it falls. Be skeptical of anyone who claims to know the exact reasons. Investigate for yourself and don’t invest anything you’re not willing to lose.
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