Price Will Go Down When Token Unlock Occurs ?

A member asked a query in CCP, that what happens to the price after a token unlock event, let’s dwell on that .

When we check the tokenomics of this or that project, we often see that there are different unlocks/vesting periods. Big unlocks often create volatility in the market, and it affects the project’s price. Let’s check what happens when token unlocks are available. Of course, that doesn’t mean it will happen the same every time. But of course, it’s better to be aware of how the price and market reacted to such events in the past.

Generally the reaction is negative meaning the price of the coin will go DOWN.

Past Performance of Token Unlock

6th Man Ventures did an analysis of 5000 coins which underwent a ‘token unlock’ event. The summary of their finding paint an interesting picture :

  • Small unlock events, those that increase circulating supply by 0% to 1%, had no meaningful impact on price.
  • Larger unlocks, those that increase circulating supply by greater than 1%, correlated to a noticeable, negative relationship: as unlock size increased, prices decreased.
  • Tokens that have vested most of their supply (more than 70%) had both substantially lower volatility and higher relative prices than tokens early in their vesting periods.
  • Protocols with a higher than average allocation to private groups (e.g. team, investors) than public groups (e.g. ecosystem, community) showed modestly better performance. The results, however, in our view weren’t meaningful enough to be a primary consideration for token engineers.  

From these insights they derived three considerations for token/coin devs :

  • Consider sizing unlocks to be no larger than 1% of the circulating supply. Bias towards daily or weekly unlocks instead of quarterly or annually.
  • Rethink the inclusion of a large vest cliff. Such events can create significant and unnecessary price pressure.
  • Be aware that token price may be substantially more volatile in the first half of the vest schedule.

Factors which Reduce Price drops

If you see a token with an upcoming token unlock event and the team is considering factors mentioned below, you may see a controlled price volatility.

  1. Gradual Release of Tokens: By releasing tokens over time, projects can avoid large, sudden increases in supply that may lead to price drops. This approach allows the market to gradually absorb the new tokens, minimizing the potential for price volatility.
  2. Community Engagement : Engaging with the community and managing expectations is crucial during token unlock events. By openly communicating unlock plans and their potential impact on token prices, projects can foster trust and transparency with their stakeholders.
  3. Diversification of Distribution: Diversifying the distribution of tokens can help reduce the impact of any single unlock event. By allocating tokens to various stakeholders, such as team members, investors, and community participants, projects can create a more balanced and resilient ecosystem.
  4. Alternative Release Mechanisms: Exploring alternative token release mechanisms, such as vesting schedules or lock-up periods, can provide more stability during unlock events. These mechanisms can incentivize long-term holding and discourage short-term selling, helping to maintain price stability.
  5. Strategic Partnerships: Forming strategic partnerships and collaborations can help bolster the demand for a project’s tokens, offsetting the potential impact of unlock events. By partnering with other projects, organizations, or influencers, projects can increase their visibility, credibility, and user base.
  6. Product Development: Continuously developing and improving a project’s products or services can help drive demand for its tokens, counteracting the potential price drops associated with unlock events. By demonstrating value and progress, projects can attract new users and investors, supporting long-term growth.

By adopting a proactive and strategic approach, crypto projects can weather the storm of token unlocks and emerge stronger, more resilient, and better positioned for long-term success. However historically and with the data set it is evident with majority of token unlocks result in decrease in price .

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