Binance Research News: How do we go to low circulation/high FDV tokens

Author: jiexuan chua, Brian Chen, Binance Research; Translation: 0xjx@作 作 作 作 作

1. Points of this article

• In recent months, the hotspots of the encrypted community discussion are those tokens with high valuations and low initial circulation.This market structure has triggered concern for traders after TGE.

• The data of CoinMarketcap and Token UNLOCKS confirmed that the trend of tokens was increasingly apparent to the trend of low circulation and high valuation issuance.It is worth noting that from 2024 to 2030, tokens worth about $ 155 billion will be unlocked.If the needs of the buyer and the inflow of capital have not increased accordingly, such a large number of tokens into the market will cause selling pressure.

• Factors such as private market capital influx, radical valuations, and optimistic market emotions have contributed to the trend of tokens issued by highly diluted valuation (“FDV”).

• The current market conditions make investors more picky and prudent, and consider the basic aspects of the project, such as token economics, valuation and products.The project team may also need to consider the long -term impact related to the design of the tokens.

• VC continues to play an important role in our industry, and can cooperate with the project team to ensure fair supply distribution and reasonable valuation.

Second, market observation

In recent months, the hotspots of the encrypted community discussion are those tokens with high valuations and low initial circulation.This market structure has triggered concern for traders after TGE.

This kind of concern is not unfounded.Tokens are issued with low circulation, and most tokens have become a common phenomenon in the future.In the bull market conditions, due to limited liquidity available for transactions at the time of issuance, these tokens may rise rapidly.However, it is clear that when a wave of tokens are unlocked, this price growth is unsustainable.

In addition, the FDV of the newly issued tokens is equal to the establishment of 1 layer or DEFI tokens that have been tested after the test and the user’s attractiveness.In general, market participants are now aware of the influence of low circulation and high FDV tokens.

In this report, we will discuss this market trend more in detail.We first introduce our observations of more and more high FDV tokens and discuss potential market impact and its significance.Then, we analyze the root cause of this trend, especially private market activities may be a factor.Finally, we put forward some suggestions to identify and reduce the negative impact of this trend, focusing on tailor -made suggestions for investors and project teams.

2.1 Low circulation, high FDV

One obvious trend is that the recently issued tokens issued high valuation and low circulation.This is particularly obvious when we compare the tokens that have been issued in the past few years -the ratio of the tokens (“MC”) and FDV issued by the tokens issued in 2024 are the lowest.This shows that a large number of tokens will be unlocked in the future.

Fig

Source: Twitter (@Thedefivillain), CoinMarketcap, Binance Research, as of April 14, 2024

Figure 1 shows the market value and FDV of the tokens issued in the past three years, highlighting the gap between these indicators over time.It is worth noting that although the FDV of the tokens issued in the past few months has just begun in 2024, which has been close to the total amount of 2023, which highlights the general existence of high valuation tokens.

The MC/FDV of the tokens issued in 2024 is 12.3%, and a large number of tokens will enter the circulation in the future.This also means that for these tokens to maintain the current price in the next few years, it will need about $ 8 billion in demand -side liquidity to flow into these tokens to match the increase in supply.Although the market cycle may change, this may not be easy.

Check some recently issued tokens, revealing the fundamental reasons for FDV high in 2024.Figure 2 shows the percentage of several tokens issued in recent months and its circulation and lock -up supply.The circulation supply is as low as 6%and does not exceed 20%, the root cause is obvious.

Figure 2: The recently issued token circulation supply is extremely low

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

For the same demand, low circulation supply has contributed to higher initial token prices, thereby promoting higher FDVs.

The peak FDV of the same set of tokens is compared with the medium FDV of the top ten tokens (excluding BTC, ETH, and stablecoin) in the market. You can feel the relative valuation of the recently listed tokens.When their peak value, the valuation of some tokens is similar to the largest tokens in the market, and these tokens have been in the market for many years.

Figure 3: In the peak, the valuation of some tokens issued recently is similar to the largest tokens in the market.

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

It should be noted that the FDV alone cannot describe the situation in a complete description. They are not as meaningful as the FDV ratio (such as FDV/total lock value, FDV/income, etc.), because these ratio considers the operating indicators.

In the past few months, many projects have issued their tokens, and many tokens have low circulation and high FDV.Because of the large number of such projects, we only chose to show.Please note that this is just to explain the widespread existence of low circulation and high FDV tokens, and does not reflect the negative assessment of the selected project value or potential, because there are many other factors working.

2.2 Market impact and significance

Tokens with low circulation circulation have affected the market dynamics, especially increased selling pressure.According to the report of Token UNLOCKS, it is expected that about $ 155 billion will be unlocked from 2024 to 2030.

Although this number is estimated, its significance is obvious -it is expected that a large number of token supply will be released in the next few years. Without the corresponding capital inflow, many tokens will face significant selling pressure.

In view of this, understanding the tokens unlocking plan and tracking are vital to investors to prevent them from being surprised when they are unlocked on the tokens.

Figure 4: US $ 155 billion will be unlocked in the next few years

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

A related observation is that so far this year, MEME tokens have performed better than other tokens.In addition to significant cognitiveness and strong speculative needs, their token supply structure has also played a role in this year’s rise.

Figure 5: The MEME tokens have become the best themes for their performance so far this year

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

Most MEME tokens have been unlocked and circulated when TGE, eliminating the selling pressure brought by future dilution.Many MC/FDV ratios at the time of distribution are 1, which means that the holder will not be further diluted due to tokens issuance.This structure plays a certain role in the attractiveness of the MEME token, especially when the awareness of the influence of large -scale tokens unlocking has increased.Although the success of the MEME tokens should not be completely 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 practicality.

Similar to the famous “GameStop” incident in the stock market, many retail investors regard the MEME tokens as a means of advantage that confrontation agencies gain in private rounds.This is because the Meme token is usually issued in a way to be open to anyone, and institutional participants have almost no chance to get the tokens at a low price in advance.Therefore, the Meme token has become an important theme in the current market, which continues to attract a large amount of transaction volume and strong price fluctuations.

How do we reach this step?

The high valuation, coupled with the continuous selling pressure brought by tokens, constitutes a structural negative impact on the token price.However, as observed in the previous section, this situation has become more common in recent years.There are several factors that contribute to this.

3.1 The influx of private market capital

VC funds are becoming more and more key roles in the field of encryption investment.Despite the natural fluctuations of capital investment in the market cycle, VC capitals that have flowed into the encryption field since 2017 have been steadily rising.Since 2017, the total VC fund investment encryption project has exceeded $ 91 billion, which proves the importance of VC to provide necessary funds for the project.

Figure 6: VC funds since 2017 have exceeded 91 billion US dollars

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

However, the significant increase in investment has also led to the corresponding increase in VC’s impact on shaping the valuation of the encryption market.As more funds flow into this field and VC participates in more transactions, they have essentially promoted the rise in valuation.

Therefore, when the contemporary currency was launched in the open market, their prices and valuations have been raised.In fact, the large -scale private equity market fundraising has led to a valuation of billions of dollars when the tokens were launched, making it more difficult for public market investors to make a profit from future growth.

3.2 Audit valuation

This year’s strong market performance has stimulated market emotions and promoted more radical trading activities.This has caused some investors to invest in higher valuations.

Considering that the valuation of millions of dollars has become normal, a cautious attitude towards valuation may make VCs look unfavorable in front of its LPS, because this means that most of the transactions have been missed when the transaction activity rises.Although market activities are still lower than the peak of 2022, the number of encrypted transactions in the first quarter of 2024 increased by 52.1%month -on -month, reaching the highest level in the past two years.

Figure 7: This year’s trading activities have increased

In addition, in the bull market, VC has motivation to continue to deploy capital.As long as the music is constantly, the high valuation will increase the VC’s performance indicators.In addition, for the project, it is beneficial to raising a large amount of funds with high valuations, because it provides it with unbounded operating funds.This also shows the strong support of “smart funds”.

Overall, raising funds with high valuations in private equity means that the stakeholders have the motivation to publicize tokens with higher fully fully diluted valuation (FDV).

3.3 Optimistic market emotions

As the market value of the crypto market increased by 61%in the first quarter of this year, the market sentiment during this period was obviously very positive.In the 91 days of the first quarter of the first quarter, Coinmarketcap was in the “greed” and “extreme greed” interval in the first quarter.Correspondingly, the project team can use this positive investor emotion to raise funds in the first quarter with higher valuation.

This can be seen from the increase of valuation in the first quarter.Specifically, VC -supported encryption companies rebounded more than 70%from the previous quarter in the first quarter of 2024.This shows that on average, the project can raise the same amount of funds when reducing dilution in the previous quarter.

Figure 8: In the first quarter of 2024, the pre -valuation of the valuation rebounded

Fourth, some thinking

4.1 For investors: The fundamentals are important

The current market structure makes investors more carefully selected.Considering that many projects have high valuations from the beginning, the probability of “speculative” New Type obtained sustainable returns is low.Most of the rising space and opportunities that are easy to make money may have been caught by early private equity market investors.

Whether investing in a private equity round or the first token issuance (TGE) in the token currency, investors should conduct a thorough due diligence and establish their own investment processes.Some of the fundamental indicators and aspects worthy of attention include, but not limited to:

• Token Economics: The importance of unlocking plan and unlocking period cannot be underestimated because they directly affect the tokens on the market.Without corresponding demand, token prices will be excessively sold.

• Valuation: FDV provides a general sense of scale, but it is not very meaningful.Evaluate the valuation ratio compared to other competitors and the time change (such as FDV/income, FDV/locking total value, etc.).

• Products: Considering the location of the project in the product life cycle (for example, the white paper stage is still online).Is there a product market fit?Observe user activities (for example, the number of daily active addresses, daily transactions, etc.).

• People: This includes teams and communities.What is the background of the founder and how do they contribute to the project?What is the participation of the community, what are they most excited about the project?

Instead of actively chasing the next shiny tokens, spending time evaluation fundamentals will help identify and avoid obvious risks and traps.As Warren Buffett said: “Only when the tide retreats, you know who is swimming naked.” Everything usually looks good until the music stops.Avoid becoming the last currency holder.

4.2 Based project party: Consider long -term development

Considering many aspects and stakeholders that need to be considered, it is not easy to run a project.Decisions are complicated and cannot satisfy everyone.Nevertheless, we believe that one of the principles of decision -making is to consider long -term development.

• Token Economics: The launch of a low -circulation and high FDV tokens may help rising initial prices due to limited token supply.However, the subsequent unlocking will cause huge selling pressure on the tokens.The loyal token holders of the project (can be said to be one of the most important groups in the community) will suffer.Poor token performance may also prevent new ecosystem participants from joining the network because the incentive mechanism has declined.

In this regard, token distribution, unlocking and belonging plan should be carefully considered.Although token economics is more like an art rather than science, without magical numbers or methods, it is clear that the recently launched tokens are very low, as shown in Figure 2.In order to reduce the risks brought by the sudden increase in supply, teams and investors can consider the token destruction mechanism, align the milestone of the ownership plan, and increase the initial circulation supply during the TGE period.

• Products: Although the tokens can help get market attention and are a good user acquisition tool, a feasible product is the key to creating value, user retention and sustainable growth.Before TGE, it will help investors and users to better understand the value claim of the project and determine the product market fit.In the best circumstances, launching a product with significant user attraction can promote successful TGE by enhancing confidence and attracting high -quality investors and users.In the long run, the product increases the inherent value of the token and helps the token price performance.

With the rebound of financing activities in the first quarter, the founder of the project can use emotional rise to obtain higher valuations.However, although it is meaningful to raise funds with high valuations intuitively (who refuses to raise the same funds with fewer dilution?), This has a long -term impact.Projects that raise funds at a significant price of internal value will be proved to this premium in future subsequent private equity rounds or open markets.If you can’t do it, token prices may tend to its true value.Investors will suffer losses, and the project team may be difficult to reverse community emotions.

5. End language

Token economics is undoubtedly one of the most important considerations for investors and project teams.Each design decision is accompanied by a series of interests and weighing.Although the launch of tokens with low supply of initial circulation may promote the rise in initial prices, the stable unlocking and issuance of tokens will cause selling pressure and affect long -term performance.If such a trend becomes industry specifications, the unlocking of billions of dollars in the next few years will lead to more and more difficult growth in sustainable growth, unless the corresponding capital inflows can match these unlocks.

VC continues to play a key role in our industry. Tokens supported by VC are not generally not generalized.The project team and VC should work together to ensure that the supply distribution is fair and reasonable, and the valuation is reasonable.