We will explore the current issuance status of altcoins and their impact on the market. There is a trend in this cycle where a large number of new tokens are launched with high FDV and airdrop models, followed by a significant unlocking of tokens held by venture capitalists (VCs).

Cryptocurrencies exhibit reflexivity. So, what happens in the market under this trend?

Reflexivity: The Great Idea About Feedback Loops

Reflexivity, initially proposed by George Soros, is a theory suggesting that positive feedback loops between expectations and economic fundamentals may cause price trends to significantly and persistently deviate from equilibrium prices. Bitcoin has long been characterized by strong reflexivity. While Bitcoin’s positive cycles may endure for extended periods, its negative cycles are notorious for their length and depth.

Cryptonary believes that when analyzing market trends and operations, it’s essential to remember that the concept of market reflexivity contradicts traditional wisdom. In theory, markets are always seeking balance, and all participants are rational actors making decisions based on facts. Bubbles, panic events, and boom-and-bust cycles are examples of abnormal market fluctuations; prices ultimately return to equilibrium. Prices have no connection to establishing this equilibrium.

On the other hand, in market reflexivity, everyone makes judgments based on their understanding of reality, and prices do indeed influence market fundamentals. You can observe this scenario: if pricing affects fundamentals, then price changes must also affect fundamentals, which in turn affect investor expectations. Investors act based on these adjusted expectations, which in turn influence prices. Boom-and-bust cycles are caused by the positive feedback of market reflexivity because herd behavior reinforces price changes, pushing prices further away from reality, eventually becoming the new reality.

Prices should trend towards equilibrium, but due to market reflexivity, prices often remain above or below equilibrium levels for extended periods. Only when market participants realize that their views are no longer based on reality do prices begin to shift; this typically occurs after prices have been above or below reasonable levels for a long time.

As you can see, reflexivity is bidirectional; a ball thrown into the air will eventually fall back to the ground.

If Bitcoin experiences a significant surge in a short period, it’s almost certain that its price will continue to rise for some time after the initial fluctuation. Conversely, the same holds true. The cryptocurrency market is still in its early stages, making it “easier” for significant price fluctuations to occur.

The diagram above perfectly illustrates reflexivity. I believe you now have a good understanding of this concept.

Now, let’s take a closer look at altcoins specifically and consider what changes might occur in the entire market as a result of the influx of numerous new tokens.

New Quality Tokens Launch Are Beneficial

I’ve previously addressed the issue of supply and demand in cryptocurrencies, but let’s briefly recap here.

Market Cap: Circulating Supply x Price

Fully Diluted Valuation (FDV): All tokens (including unreleased ones) x Price

This is crucial for understanding VC/angel dynamics.

Most cryptocurrency companies raise funds from investors through SAFT (Simple Agreement for Future Tokens). In the stock market, SAFT can be likened to a Simple Agreement for Future Equity (SAFE), allowing startup investors to convert their cash investments into equity at a future date under specific conditions.

To illustrate a typical SAFT transaction, let’s consider a simple example:

Token Name: Yolo Coin

FDV: $100 million

Vesting Terms: TGE (Token Generation Event) 10%, then 1-year lockup, followed by linear vesting over 3 years

Circulating Supply at TGE: 12% (partly through airdrop)

Yolo Coin launched officially after much hype, and its FDV has now reached $1 billion (a 10x return for seed investors). Investors are pleased because they can sell at breakeven prices, and they still have 90% of allocated tokens, which will unlock gradually over 36 months (1 year after the lockup period).

But wait? Why such a long lockup period for VCs? Simply put, it ensures long-term alignment and prevents it from being shifted onto the TGE.

Now, let’s address why this is problematic:

Because investors’ tokens are locked up for a long time, this means when they eventually start unlocking, the market will face sustained selling pressure. See the diagram below.

Assuming Yolo Coin’s initial price is $1 (investor price = $0.10). At issuance, 12% of the supply is in the market, but as tokens unlock gradually, more supply enters, causing an increase in supply.

But where’s the demand? Who will buy tokens sold by VCs?

You might argue that due to Narratives X, Y, and Z, prices will rise, TVL (Total Value Locked) in DeFi protocols will increase, bullish events, etc., which may sustain for a while. However, at some point, supply will outstrip demand, and we’ll start facing a spiral downward due to massive inflation.

Early buyers will be trapped, leading to bearish sentiment in the community, decreased TVL in protocols, developers (if any) leaving for better areas, team members quitting, etc.

Thor Hartvigsen summarized it well: “The market won’t be able to absorb all the extra liquidity and the desire for airdrop recipients to cash out rather than ‘stake for future airdrops.’”

So far, the biggest change in this cycle is the dispersion of funds. We’re used to thinking that altcoins will rise together. There might be 300 decent projects now, but not enough liquidity for all of them to rise.

We often hear about altcoin fever, but this time it might be different. We’re used to hearing claims like all tokens will rise once the time comes. But is that true?

Remember, there are way more “utility” tokens in the market now than in 2021. There are now 3-5 “quality” tokens entering the market every week. The total market cap rises, and everyone seems happy. But ask yourself, who’s buying all these tokens? Unless institutions or retail pour in massively, this will just be a PvP game.

A recent example from two weeks ago is the Wormhole airdrop, which had an FDV exceeding $10 billion at launch. Now ask yourself, why hold it? Other than pure speculation, I can’t see any other reason. Since launch, the token’s price has dropped 40%, with an FDV of $6 billion.

As Cobie put it:

“Market cap is the measure of demand, while FDV is the measure of supply.”

This means the market cap is the total value of public demand, which rises and falls with price movements. If prices increase, both market cap and FDV increase, but as tokens unlock, market cap also increases.

Let’s take a look at Pendle. Everyone loves Pendle now, with its TVL skyrocketing due to yield farming and the EigenLayer narrative.

Pendle market cap: $640 million, FDV: $1.7 billion

Additionally, please note that out of a total supply of 258 million Pendle tokens, 95 million are currently circulating (37%). As the token price increases, the market cap also rises. However, an increase in market cap does not necessarily mean an increase in demand for these locked tokens. To explain why, let’s consider it from the investors’ perspective. I know people who bought Pendle for less than 10 cents. Now, the price is over $6. Do you really think investors holding locked tokens care if the price is $6 or $7? No, so they sell. The result is: that supply increases, but demand remains unchanged. (I haven’t checked Pendle’s unlocking schedule or the FDV at the time of investment, just made some assumptions to explain supply and demand).

Are high FDV tokens scary? Not always. A good example is TIA, launched in November 2023. TIA currently has an FDV of up to $12 billion, but since the locked tokens won’t be released until the fall of 2024, the situation doesn’t look so bad. However, some traders may be intimidated by high FDV.

For more information on this topic, please refer to Cobie’s article:

https://cobie.substack.com/p/on-the-meme-of-market-caps-and-unlocks

Alright, but back to the previous question: where is the demand, or in other words, where are the buyers?

Nowadays, there are new “quality” projects launching every week, with high FDVs. This means countless supplies are flooding the market, and these tokens are bound to decline unless new buyers come in (at least in the long term).

Retail investors are already here, holding memecoins and altcoins on Solana. They’re not buying fancy VC tech tokens. They’ve learned from the experience of 2021. In the long run, unlicensed token listings and greedy VCs are very detrimental to individual token holders. Hundreds of new tokens are launched every year, continuously diluting existing tokens.

It’s now April 2024, and the funds flowing into altcoins seem more selective, and insufficient to offset massive token unlocks.

Is there a solution?

We already know that the low float token model is not friendly. But can we solve this problem?

Clearly, a big part of the issue lies in the number of projects launched. Not everyone can buy into all these projects. But more linear unlocking schedules and retroactive airdrops might be wise (in contrast to Arbitrum): think of projects like Ethena and EtherFi, which are undergoing two rounds of airdrops. Perhaps restoring ICOs could help, creating more loyal fans.

Return from here:

I believe that when BTC dominance trends lower and altcoins can freely circulate, there will be a few altcoins that surge significantly. There are more participants in the cryptocurrency space now than in the previous cycle, but people are smarter now. We will go through rotations as we have in the past six months, and blindly bullish tokens may be a losing game.

According to data from Thiccy, $250 million worth of altcoin supply enters the market daily from new tokens and unlocked old tokens. Due to upward reflexivity (positive feedback loops), most of these tokens are not immediately sold because the market is rising (fear of missing out). That’s why we saw a lot of selling in April; the market just needed a reason (the war).

By 2024, token unlocks, new token entries, and staking rewards for existing tokens have led to a daily increase of $250 million in altcoin supply. Due to the issuance of new tokens, the growth rate of FDV has exceeded that of circulating supply, increasing by about 70% since the beginning of the year. The price difference between FDV and circulating supply (representing how much supply will enter the market in the future) has increased by over $150 billion since the beginning of the year. As funding slows into mainstream tokens, the weight of daily altcoin supply becomes more apparent.

Regardless, due to the continuous launch of new tokens and the influx of new supply into the market, the total market cap of altcoins is steadily increasing.

The example you mentioned is of some high market cap/FDV tokens. Take Worldcoin, for instance: with a market cap of $1 billion, but an FDV reaching $640 billion. What does this imply?

This implies that Worldcoin will have a stable market supply in the future. In July 2024, they will start massive selling, with 6 million WLD tokens entering the market daily. For reference, there are currently 181 million $WLD tokens in circulation…

Clearly, this is extremely risky.

By looking at the basic supply and demand curve, it’s easy to see that when this supply floods the market, it will be challenging for the price of WLD to rise.

Who will buy 6 million WLD tokens every day?

What Does This Mean For the Bull Market?

If BTC and ETH keep rising, the situation might not be too bad. But in bearish conditions, we’ll see some dreadful scenarios unfold.

However, I like the approach of going long on strong currencies and short on weak currencies, like Anteater. It’s a hedging strategy, unlike Ethena, which hedges delta neutral. It might sound strange to hedge during a bull market, but there will be several downtrends along the way up. It’s not a straight line to the peak.

Moreover, several recent posts on CT claim that this cycle is already 70% over. Who knows, so please decide the level of risk based on your own tolerance.

I believe that most new VC coins (high FDV coins) will eventually see significant declines. You can take advantage of this in pairs trading or hedging strategies.

Examples of weak tokens might include STRK, APE, BOME, ADA, CRV, and XRP. Or, if altcoins perform well overall, combine these weak altcoins with strong ones. Currently, strong altcoins include ENA, TON, FTM, and PENDLE. However, due to the ever-changing market momentum, it’s not advisable to go long/short on these tokens.

The advantage of Memecoins is that they are actually some of the few honest tokens. WIF, PEPE, $DOGE, POPCAT, with the same circulating supply as the total supply. No one will dump on you according to a crazy unlocking schedule; it’s just player versus player.

Lastly, here are some words from cryptocurrency trader Wazz:

I think his arguments make sense. Too many altcoins, too many projects, and too many unlocked tokens will impact the market in the future.

If the price of Bitcoin rises sharply in a short period, then after the initial rise, the price is almost certain to continue rising for a period. Conversely, the same is true. The low liquidity in the cryptocurrency market means prices are “more likely” to rise and fall sharply.

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