The cryptocurrency market has various influences; however, the initial impression of new traders often overlooks token unlocks. Investor sentiment, technological advancements, regulatory changes, and the overall crypto market are common factors; however, when locked tokens enter circulation through schedules via token unlock, this has an impact on the price of the crypto due to the vast amount of tokens hitting the market. Token unlocks are simply part of the release-of-tokens distribution process. Token unlocks gradually release a percentage of the token supply instead of the full amount when first launched; this creates incentives for founders, contributors, and investors to hold through to the end; however, this also ultimately creates price volatility when locked tokens come out into the open and may subsequently be traded. As such, to make an appropriate investment decision into cryptocurrencies, investors need to understand how token unlocks will affect the supply available in-system to demand, the supply/demand equation, and the psychology of all individuals in the market after token unlocks have occurred. This guide provides information on what token unlocks are, their significance, and how token unlock mechanisms will affect price volatility over time in crypto.
What Are Token Unlocks?
The process of unlocking tokens is a planned occurrence in which previously locked crypto tokens are released into circulation. Tokens can be allocated to various individuals such as project founders developers, advisors, early investors, ecosystem funds, and community rewards.
Typically, a blockchain project will follow a vesting schedule. This means that rather than giving out all of the tokens at once, there will be a gradual distribution of tokens over the course of several months or years to specific groups. When a vesting milestone occurs, the holders of the locked tokens have access to transfer these tokens (sell, stake or use them in the projects ecosystem).
The token unlocks and vesting schedules are all carefully planned prior to the unlocking by the respective project teams and may be included within the project’s whitepaper or tokenomics documentation.
Why Do Crypto Projects Lock Tokens?
There are three primary functions that token locking serves. The first is to protect against the potential of large amounts of tokens being sold by founders and early investors immediately after the launch; as such, it provides additional stability in an environment that may experience rapid fluctuations in value.
The second function is to provide a mechanism through which developers and advisors can continue to contribute to the success of the ecosystem because they will progressively receive their tokens over time. Therefore, as these parties continue to work on the project, they will remain aligned with its long-term success through financial incentives.
The third function of token locking is that the gradual release of tokens into circulation creates a stable supply curve for the tokens to be absorbed into circulation over a longer duration of time, rather than in one large amount at once.
How Token Unlocks Increase Supply
An immediate result of a token unlock is that the circulating supply will increase, which will give holders the opportunity to sell their tokens on crypto exchanges once there are more tokens available. If a large number of token recipients decide to take profits at the same time, then there will be an increase in selling pressure due to large supply increases. According to basic economic principles, price declines occur when an increase in supply exceeds an increase in demand. Consequently, investors usually have a close eye on an unlocking schedule, especially when a project has a large number of locked tokens.
However, an increase in the supply of tokens does not necessarily mean that the price will drop. There are additional factors affecting the eventual effect on the market beyond supply and demand.
The Role of Market Demand
Token unlocks also depend on the level of demand that exists for them. When a blockchain project has a high rate of adoption, growing transaction volumes, and increased utility, it is likely that any new tokens created as a result of unlocking will be absorbed at little to no impact on price. This is because if the demand from institutional crypto investors, DeFi applications, or other new users is greater than the amount of token holders who are selling their unlocked tokens, then the price will remain stable in the market. When there are very strong bull markets, the demand from investors will remain so high that it will have little to no appreciable impact on the token unlocks.
Investor Psychology During Unlock Events
The level of demand for a particular token influences how many unlocked tokens there will be. This means that as a project has more & more users, increased volume of transactions and new ways for the tokens to be utilized, the likelihood of newly- issued (unlocked) tokens being added to the market without affecting the token’s price increases. In other words, If you are an institutional crypto investor or using DeFi applications or just started using a new project, you have demand for your unlocked tokens that far exceeds those who have unlocked their tokens and are selling them, and as a result there will be very little or negligible effect to the price of the token in the marketplace. In a time of very strong bull markets there is so much demand for an investor’s investment that the investor will experience minimal or negligible impact from any token unlock.
Who Receives Unlocked Tokens?
The identity of the token recipient will affect the price of the token.
If the recipient of the unlocked tokens is a venture capital firm or an early investor who acquired the tokens at a significantly lower price than they will sell them for, they would be more likely to realize their profit for the sale of the tokens.
The tokens given to development funds, staking rewards (such as interest earnings), or other incentives to grow the project ecosystem are likely to be distributed more continuously into the market as opposed to being sold immediately upon release.
Project founders and team members typically hold significant amounts of tokens, and in credible projects, they are frequently holding on to their tokens as a sign of their confidence in the project’s future. This helps prevent any immediate selling pressure from the team members.
By knowing who is receiving the unlocked tokens, investors can form a better estimate as to how these tokens may affect the overall market price.
Large Unlocks vs. Small Unlocks
Not all token unlocks affect prices in the same way.
The impact of unlocking tokens on the market can vary widely based on the size of the token unlocking compared to the pool of total tokens that exist. Typically speaking, small unlockings (small compared to the total supply) will have little market impact as new tokens will get absorbed by other activity in the market when they become available for sale.
In contrast, when a large portion of the total supply is unlocked, it creates volatile conditions. If a project suddenly increases the total amount of tokens in circulation by 10%, 20%, or more than that, it will be difficult to absorb those new tokens quickly enough.
Therefore, investors will typically look to keep an eye on any unlock events that have a relatively large share of total circulation because these events are historically correlated with a larger price reaction than smaller unlock events are.
How to Analyze Upcoming Token Unlocks
Before making an investment decision on any cryptocurrency, it makes sense to review the schedule of the tokens in that cryptocurrency. Start with the tokenomics of the project so that you can get an idea of how much of the total supply is still locked up. Then, look for future release dates, the amount of tokens that will be released at those future release dates, and who will receive those tokens.
Also, when checking the size of a release in comparison to the circulating supply, a release that is 2% of the existing circulating supply will most likely have a different effect than one that is 25% of the existing circulating supply.
Finally, if you are going to look at the general market environment that you will be invested in, the likelihood that any selling pressure from token unlocks can be absorbed is higher during periods of strong demand in bullish times than in bearish ones.
Can Token Unlocks Be Positive?
Token unlocks often receive negative views, but they’re not always detrimental.
Through steady releases, tokens can create increased liquidity, which allows investors to buy/sell with less volatility in price. Token unlocks also fund continued development, marketing, partnerships and expansion of ecosystems.
When responsibly distributed with true network growth, additional token supply can lead to long-term use rather than diminishing token value.
Generally, projects that have clear tokenomics and predictable vesting timeframes generate greater investor confidence.
Best Practices for Investors
When responding to each token unlock announcement, it is better to have a more balanced view than purely an emotional one.
Before investing, an individual should look at each project’s vesting schedule, be sure to keep an eye out for any upcoming unlock events and assess the potential demand to be generated from each of the newly-available tokens to help offset any subsequent increase in the supply of that token. Additionally, an investor should learn about who will receive the new tokens, the current market sentiment surrounding that token at the time of the unlock, and the overall health of the blockchain’s ecosystem as a whole instead of just concentrating on the unlock itself.
An investor that wants to invest for the long-term should remember that token unlocks are frequently preordained for many years into the future, and that they are a normal part of a project’s economic design.
Conclusion
The structure and implementation of cryptocurrency tokenomics can provide critical insight into the potential for price changes due to future-token-unlock events. Token unlocks can increase the number of available tokens on the market (circulating supply), which may cause some selling pressure on that token if a significant amount of tokens is unlocked to early investors or insiders. However, this impact will vary widely based on other factors, such as the level of demand for the tokens, the sentiment among investors regarding the project, whether or not the token or project has been widely adopted, and how much volume will be released from the unlock event.
Understanding future-token-unlock schedules will enable cryptocurrency investors to better predict how volatile the market will be and how sustainable a project will likely be in the long-term. Investors ought to assess each potential future-locked token unlock as not only a future cause of worry but also whether that potential event is based on the overall tokenomics and current market conditions for that particular project. Doing so will allow investors to conduct more thorough analysis to better understand the impact of investing in the digital asset market and how it operates.
