The cryptocurrency market has seen a concerning trend lately, with an increasing number of tokens being launched with limited circulating supply and inflated valuations. This has raised questions regarding the sustainability of the upside potential for traders following the token generation event (TGE). Binance Research’s latest findings have highlighted this issue, outlining the potential risks associated with tokens that have high valuations but low initial circulating supply.
The influx of private market capital, coupled with aggressive valuations and an optimistic market outlook, has led to the practice of cryptocurrency tokens launching at steeply high fully diluted valuation (FDV) points. The report estimates that a massive $155 billion worth of tokens will be unlocked from 2024 to 2030. This influx of tokens without a corresponding increase in buy-side demand and capital flows could result in significant selling pressure, challenging the market’s ability to absorb these tokens without negatively impacting prices.
Challenges in the Market
Under bullish market conditions, these tokens may experience rapid price appreciation due to limited liquidity available for trading at launch. However, this kind of growth is unsustainable when a wave of token supply hits the market upon unlocking. The analysis highlights a growing gap between market caps and fully diluted valuations (FDVs) for tokens launched in the past three years, with 2024’s FDVs already approaching 2023’s totals. Tokens launched in 2024 have an average MC/FDV ratio of just 12.3%, indicating that around $80 billion in new demand would be needed to match future supply increases and maintain current prices.
This trend is primarily driven by recent token launches with extremely low circulating supplies, often below 20% of the total supply. With the majority of tokens locked, their FDVs are inflated compared to actual market caps. Over 80% of newly listed cryptocurrencies on Binance have seen a decline in their value, indicating the risks faced by investors in such high valuation tokens. Most of these tokens are backed by top-tier VC firms and are launched at inflated valuations, with the average FDV exceeding $4.2 billion at listing and some even surpassing $11 billion.
To address the concerns surrounding tokens launching at high valuations with low circulating supplies, Binance has called for fostering a healthy and sustainable market environment. The exchange plans to engage small to medium projects and invite high-quality teams and projects to apply for listing programs such as direct listing, Launchpools, Megadrops, etc. This approach aims to promote a more balanced and stable market for cryptocurrency trading, mitigating the risks associated with inflated valuations and limited circulating supplies.
The surge in tokens with high valuations and low initial circulating supply poses significant challenges to the cryptocurrency market. Investors need to be cautious and understand the risks involved in trading such tokens. By fostering a healthy and sustainable market environment, exchanges like Binance can help mitigate these risks and create a more stable trading landscape for cryptocurrency enthusiasts.
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