We know that the world of crypto is exhilarating, but it can feel like you’re sailing through a dangerous tempest. One of the most important waves investors should be cognizant of is the biggest, the “token unlock.” When these previously locked tokens enter the market, they can sometimes send shockwaves through cryptocurrency prices. These events can produce anything from ripples to full-blown tsunamis in the marketplace. DeFi opinion columnist Anjali Mehra breaks down what these unlocks mean for investors. She lays out some advice on how to cut through that noise and confusion.
Token unlocks are often a central feature of how many blockchain projects release their tokens. And they are usually very strategically planned to build all the pieces that go into developing that ecosystem. Developing a more sustainable ecosystem These unlocks, according to Steven Goldfeder CEO of Arbitrum, are meant to develop the project’s growth. They may introduce greater volatility and liquidity displacement, which could push crypto prices downwards.
Recent unlock events for Arbitrum and Aptos showed how fickle the market can be. No one will debate that these events directly affected the markets’ reactions in each situation. With significant price movements on both the up and downside, it is crucial that investors know how to identify and gear up for these shifts. Other projects, such as Avalanche, announce their token unlock schedule in advance and publish this information in their governance white papers. This temporary and controlled distribution is meant to encourage behavior that fosters positive and long-term development of the ecosystem.
Understanding Token Unlocks
What is a token unlock, and why should investors pay attention? Simply put, it’s when a crypto project decides to release tokens they’ve been holding (for a multitude of reasons). These are tokens that could have otherwise been allocated to the team, advisors, or early stage investors. Once released, these tokens can be sold on the open market, adding to the circulating supply.
Types of Token Unlocks
There are primarily two types of unlocks that investors need to be aware of:
- Cliff Unlocks: These release a large chunk of tokens all at once. Imagine a dam suddenly opening – that's a cliff unlock. This can lead to a sudden spike in supply, potentially causing a price drop due to the influx of tokens.
- Linear Unlocks: These distribute tokens gradually over time. Think of a slow and steady drip – this allows the market to absorb the new tokens more easily, leading to more predictable supply and better market absorption.
The type of unlock has major implications on the market. This is because unlocks that are cliff-based usually create a larger price volatility, whereas linear unlocks are usually less disruptive.
Why Do Token Unlocks Matter?
Here are some strategies investors can use to stay afloat:
- Price Volatility: Major unlocks can cause short-term price swings, especially for Layer 1 and Layer 2 blockchains.
- Liquidity Shifts: Unlocks can lead to shifts in liquidity, impacting cryptocurrency prices.
- Supply and Demand: The unlock event will affect the overall token supply, which can have an impact on the market price of the token, taking into account factors such as market demand, liquidity, and overall market conditions.
Strategies for Navigating the Unlock Tsunami
Our analysis of previous token unlocks offers lessons learned. Here are a few examples:
Stay Informed: Knowledge is power. Investors can track unlock schedules using platforms like token.unlocks.app, CryptoRank.io, or Messari.io to stay informed about upcoming unlock events.
Analyze the Unlock Type: Determine whether it's a cliff unlock or a linear unlock. This will give you a sense of the potential price impact.
Evaluate the Token Supply: Consider the percentage of tokens that are locked or unlocked and how the unlock event will affect the overall token supply.
Assess the Market Impact: Consider how the unlock event will affect the market price of the token, taking into account factors such as market demand, liquidity, and overall market conditions.
Diversify Investments: Don't put all your eggs in one basket. Investors can mitigate the impact of a large token unlock on one investment by diversifying their portfolio across multiple investments.
Examples of Token Unlock Events
These illustrative examples are meant to say that while unlocks can increase volatility, this isn’t inherently bad. Often, they present opportunities for astute investors.
- dydx: The dydx token supply unlock event provides insight into how massive unlocks (> 10% of supply) can perform as well as or even better than large unlocks (5%-10%).
- Celestia (TIA): Celestia will be releasing TIA tokens to the value of 94.5% of its market cap within the next 19 weeks. Despite this large unlock, the token has only released 18% of its token supply, showing that a low float can still exist even with a large unlock.
- BRC20X: The BRC20X token unlock event shows the influx of tokens that is set to flood the market, providing insight into the potential impact of large token unlocks on market behavior.
Token unlocks aren’t the only factor here. Beyond that, the actual health of the market and the availability of liquidity play critical roles. A richer market environment with a greater breadth of players—including banks—means more opportunities for liquidity to materialize. Many institutional asset owners and managers plan to increase their allocation to more liquid investment strategies over the next year.
The Bigger Picture: Liquidity and Market Health
Global institutional investors are often the ones who work most actively to create that demand, instead driving demand for alternative investments. They are looking for portfolio diversification, return enhancement, volatility reduction, inflation hedge, and income generating vehicle which all produce liquidity. A tender offer allows many sellers to sell their shares to a single investor or group of investors, or back to the company itself. This process happens at a fixed price, providing a very controlled and highly valued liquidity lifeline. David Stewart, head of UK pensions solutions at Santander Asset Management, underlines the need for platforms. These platforms make it easier for participants to identify and access potential sources of liquidity.
By understanding token unlocks and their potential impact, investors can make more informed decisions and navigate the crypto market with greater confidence. So just like anything else out there, just make sure you’re doing your research, you’re diversifying, and you’re not panic selling when the tides come in.
By understanding token unlocks and their potential impact, investors can make more informed decisions and navigate the crypto market with greater confidence. Just remember to stay informed, diversify your investments, and keep a cool head when the waves start to rise.
