Token unlocks will bring previously locked tokens into circulation, usually triggering increased volatility and price declines.
The lock-up plan (cliff period + linear release) aims to align the incentives of early holders with the long-term development of the project.
Venture capital firms can achieve profitable exits through over-the-counter trading, phased sales, and the use of derivatives, while avoiding triggering a market crash.
The timing of the unlock, market sentiment, and the scale of individual holdings are the main factors influencing venture capital firms' decisions on when and how to act.
Token unlocks are critical moments in the crypto market and often serve as catalysts for significant price fluctuations.
For retail investors, token unlocks are akin to high-risk gambling; for venture capitalists and institutions holding large amounts of project tokens, they represent strategically planned opportunities.
Understanding how these crypto whales manage unlock points can provide important insights for ordinary investors.
Token unlocks essentially refer to the release of previously restricted tokens into the circulating market. These tokens are usually subject to a lock-up plan predetermined by the project team, which sets the schedule and amount for phased releases to early investors, team members, and advisors.
Common lock-up plans include:
Cliff period: The initial lock-up phase during which no tokens are released. This phase typically lasts several months or even over a year, ensuring that holders are long-term bound to the project.
Linear release: After the cliff period, tokens are released in batches daily, weekly, or monthly until the unlock period ends.
The fundamental purpose of the lock-up system is to ensure that the interests of early holders align with the long-term value of the project, avoiding concentrated sell-offs in the short term and reasonably adjusting market supply.
However, even with the intention of maintaining market stability, unlock events frequently bring additional selling pressure. When the increase in circulation exceeds the market's absorption capacity, prices often fall accordingly.
You may have witnessed similar situations multiple times. For example, projects like Pyth (PYTH), Arbitrum (ARB), and Aptos (APT) have all experienced significant price drops during large-scale unlock events.
Even the newly launched project Ethena (ENA) was not spared. Experienced traders often position themselves in advance, selling holdings before the unlock to cope with the pressure from increased supply.
Did you know? Over $600 million worth of tokens are unlocked weekly, with about 90% of unlock events accompanied by price declines.
The methods and goals of venture capital firms are entirely different from those of retail investors. They seek high returns on early investments, and token unlocks are core nodes for realizing profits.
They employ a series of refined strategies to maximize profits while minimizing market impact:
One of the most commonly used and efficient methods for venture capital firms (VCs) when selling large amounts of tokens is through over-the-counter (OTC) platforms. Unlike directly selling on public exchanges, which may trigger significant slippage and price crashes, VCs typically choose to transact privately with buyers. These buyers are often other institutions, high-net-worth individuals, or market makers.
Operational method: VCs hand over large amounts of tokens to OTC platforms for matchmaking. The platform matches them with one or more buyers, assisting both parties in completing private transactions at negotiated prices, which are usually slightly lower than the current market price.
Benefits for VCs: They can avoid slippage risk, maintain anonymity, prevent market panic, and flexibly customize transaction terms.
VCs often choose to reduce their holdings in batches rather than selling a large amount at once, even though it is challenging to time the market precisely. They may sell some unlocked tokens when the market is rising and buy back during declines to lower their average cost. This phased selling strategy aims to maximize returns while reducing the impact on market prices.
The most complex operational method employed by VCs is hedging unlock risks. Months before a token unlock, VCs can lock in selling prices through derivative contracts, effectively controlling risk exposure.
Shorting futures and perpetual contracts: VCs can establish short positions in the futures market for the relevant tokens, profiting through derivatives when spot prices fall, thus hedging against losses from the unlock.
Buying put options: Put options allow VCs to sell tokens at an agreed price even when prices fall, locking in a profit floor.
Selling call options: VCs may also sell call options based on tokens that are about to unlock, collecting premiums and selling at a fixed price when exercised.
Delta-neutral strategy: VCs typically collaborate with market makers to build delta-neutral positions, holding the unlocked spot tokens while shorting related derivatives, achieving a balanced state where they can profit regardless of price movements.
VCs' decisions are not made in isolation; the main factors influencing their handling of unlocked tokens include:
Market sentiment: If the overall crypto market is bearish or a particular project has a poor reputation, VCs often tend to sell quickly to cut losses; conversely, in a bull market or when the project's outlook is positive, they may choose to hold or gradually reduce their holdings.
Proportion of unlocked tokens: The larger the proportion of unlocked tokens in circulation, the higher the future selling pressure, making the market and VCs' expected reduction behavior more pronounced.
Type of received tokens: VCs differentiate between unlocked tokens from early investors/team (which carry more selling pressure) and community rewards or staking tokens (which have weaker short-term selling motives), making different decisions accordingly.
Project fundamentals and milestones: If a project achieves key development goals or secures important partnerships, VCs' confidence increases, often delaying or reducing their sell-offs; conversely, if negative news or delays occur, they may accelerate their selling.
Portfolio diversification: When managing their portfolios, VCs need to regularly adjust their holdings. Selling some unlocked tokens may be driven by the need for asset rebalancing, as well as for realizing profits, raising new investment funds, or reducing single-asset risk.
Did you know? Unlocks by teams and early investors are most likely to trigger price crashes, while ecosystem incentive unlocks can average a price increase of about 1.2%.
The influence of venture capital firms during token unlock processes has been a subject of controversy, with major concerns centered around potential unfairness and market manipulation.
Critics point out that the scheduled unlock mechanism leads to a fundamental imbalance between supply and demand—token supply is controlled by fixed plans, while demand is highly volatile. VCs can often purchase tokens at very low prices before the token generation event (TGE), and even if prices drop significantly after the unlock, they can still achieve substantial profits, while retail investors who buy after the TGE must bear the brunt of the selling pressure.
Some opinions accuse project teams and VCs of intentionally collaborating to conduct "pump-and-dump" operations, artificially inflating token prices through marketing or news generation before large-scale unlocks, then selling their tokens at high prices to unsuspecting retail investors.
VCs typically have access to more detailed information about project health, development progress, and upcoming unlock plans, giving them an inherent advantage over ordinary retail investors in terms of information.
However, it is also important to recognize the significant role of VCs. They provide valuable early funding for the crypto ecosystem and are a key driving force behind innovation and project implementation. Without VC funding, many promising projects might struggle to come to fruition.
Even if ordinary investors cannot participate in OTC trading or use complex hedging tools like VCs, they can still make more rational choices during token unlock periods by learning from VC behavior patterns:
Do Your Own Research (DYOR): Always check the lock-up and unlock progress of each project. Tools like Token Unlocks are very useful for tracking relevant information. Understand the number of tokens about to unlock and their distribution.
Anticipate selling pressure: When teams or early investors face large-scale unlocks, there is often noticeable selling pressure. Consider reducing holdings or setting stop-loss orders before the event occurs.
"Buy the rumor, sell the news" (or sell the unlock): Prices often drop as the unlock approaches and may also fall after the unlock occurs. Avoid entering the market for speculation just before key unlocks.
Pay attention to on-chain data and market anomalies: Closely monitor large fund flows on-chain, especially suspicious transfers from project teams or well-known VC addresses to exchanges or OTC platforms, as this often signals impending sell-offs. Watch for unusual changes in trading volume.
Focus on project fundamentals: Not all unlocks will have negative impacts. If a project continues to achieve milestone goals, establish solid partnerships, and demonstrate real application value, its long-term performance may withstand some unlock pressure.
Token unlocks themselves are an indispensable part of the crypto market structure. By understanding the motivations and strategies of VCs, ordinary investors can better seize opportunities during high-volatility phases and turn potential risks into more informed trading decisions.
This article does not contain any investment advice or recommendations. Any investment and trading activities involve risks, and readers should conduct their own research before making decisions.
Original article: “How VCs Trade Token Unlocks (and What You Can Learn from It)”
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