“New Launches (Part 1) – Private Capture, Phantom Pricing”
Author: Cobie
Translator: Zombit
Hello, friends. It’s been a while.
As I return to Substack, I want to discuss the current hot topic – the launch of new tokens.
Specifically, this article will focus on the misconceptions in the market about these new tokens, often described as “low circulation, high fully diluted valuation (FDV).”
While I initially planned for this to be a three-part series, given my inability to be concise, it might end up being just two parts. Let’s see how it goes.
Before we begin, if you’re confused about the topics I’ll be discussing in this article, it might be helpful to read my previous article from 2021, “Misconceptions about Market Cap and Unlocking,” written by Cobie.
As always, please remember that I am not a financial advisor. I am a biased and flawed individual who is past his prime and struggling to understand the world. I am involved in the cryptocurrency industry, which means my IQ might not even reach double digits. I try to refrain from talking too much about the tokens I own, but I might reveal that in the article.
By the way, have you heard about RoaringKitty’s comeback and the fifty cool Avengers edits he made? Well, let’s get back to the point.
When I wrote that article three years ago, I thought it might be the last time I wrote about circulating supply, FDV, and market cap games. Perhaps I was too naive, hoping that market participants would have a deeper understanding of these important dynamics. Instead, they ended up choosing these new tokens as the “best long-term hold” and citing “no unlocking for a year” as a good reason to buy, along with other highlights of the new tokens, such as brand-new charts with no historical data and focused attention.
What’s worse is that other market participants have indeed gained a deeper understanding of these dynamics. Teams, exchanges, market makers, and financiers have adapted to these market mechanisms and often leverage them to gain significant advantages.
Therefore, in my opinion, most newly launched tokens are now effectively uninvestable in the market – market participants’ understanding of these issues is extremely immature, and they spend their time blaming the symptoms of the problem.
In this multi-part series, I will explore some of the issues in the current new launch market and discuss why I choose to completely avoid new token launches – unless you know what you’re doing and can conduct proper research and analysis.
Table of Contents
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Most of the upside potential of new tokens is now privately captured
Drawbacks of ICOs
Advantages of ICOs
Shift to private fundraising
The frenzy of 2021
The value captured in the private market
High FDV partly attributed to natural market demand
Pricing after the crisis
Low circulation itself is not the problem
When this “private price discovery” happens in a manipulated market, the resulting valuations are deceptive
Choose to exit
Buying inflated FDV is your choice – you can choose to exit, and you should exit
Conclusion
In modern times, the “price discovery” of assets happens almost entirely outside the market and is even priced before token issuance. And many of these price discoveries have been overestimated due to the dynamics of the private market.
Looking back, by 2024, people will be longing for ICOs again. It’s hard not to agree with them when you see the difference in opportunities between now and then: in some ways, the ICO era seems fairer than the dynamics of the current market.
Before being misunderstood, I think it’s necessary to emphasize the actual drawbacks of ICOs. It’s easy to look back at successful ICOs, but there were hundreds of ICOs that just raised eight-figure sums and then disappeared or gradually left investors empty-handed. (Additionally, I’m ignoring the fact that ICOs were likely illegal in most major jurisdictions.)
Retail investors wasted hundreds of millions of dollars funding impractical, terrible ideas that only received funding because of the ICO frenzy. Even successful projects ended up losing money for investors. Many successful businesses turned into worthless tokens, and investors ended up with tokens that eventually became worth zero, while the companies got cash for their operations without dilution and eventually disregarded the existence of the tokens.
(This even happened in the Binance ICO – investors invested $15 million to build Binance but didn’t get the upside of Binance equity. Of course, I’m sure no one would complain about buying the Binance ICO because the price at the time was $0.15 per BNB, and it was one of the best ICOs ever. So, yeah.)
Well, ICOs were bad, we get it. But they also had their good side. And expressing the good reasons for them is much easier.
Ethereum raised $16 million in its ICO, selling 83% of its supply (60 million ETH) at $0.31 per ETH.
This put the effective valuation of the public token sale at around $26 million (mining and staking issuances made it slightly more complicated, but that’s the general idea).
Buyers in the ETH ICO achieved returns of approximately 10,000 times their investment in today’s prices (around 70 times in Bitcoin terms).
If you missed the ETH ICO, the cheapest ETH you could buy on the market at the time was around $0.433 in October 2015, just about 1.5 times higher than the public sale price. Ethereum’s valuation was approximately $35 million at the time.
While it’s nearly impossible to find a $26 million valuation in today’s cryptocurrency investments, even for a VIP seed round of an early-stage conceptual idea, the key here is that “price discovery and upside potential” were open to all participants.
From a $26 million valuation to a $350 million price discovery, it was done publicly, and regular people could participate. No KOL rounds, no unlocking and vesting schemes, and the returns from buying at the cheapest market price weren’t much different from buying in the ICO.
After global regulators cracked down on ICOs, cryptocurrency issuers stopped crowdfunding from the public and shifted to raising funds privately from venture capital.
It would be interesting to compare Solana’s first funding round with Ethereum’s ICO:
Solana raised approximately $3.2 million in this funding round in 2018, selling about 15% of its supply at a price of $0.04 per SOL. This was an effective valuation of around $20 million, similar to the ETH ICO valuation.
Buyers in Solana’s seed round achieved returns of approximately 4,000 times their investment in today’s prices. (Due to staking rewards, their actual returns might be slightly higher.)
If you couldn’t get into the limited funding rounds, the cheapest price you could buy SOL on the market was around $0.50 in May 2020 – about 12 times higher than the seed round price.
Buying at the cheapest price on the market brought returns of approximately 300 times. Solana’s valuation was around $240 million at the time, with a circulation of less than 5%. Solana only maintained low circulation for 10 months – they went from having a tiny circulation to almost fully unlocked and had a massive cliff unlock in January 2021.
The initial rounds were privileged, allowing investors to effectively capture a 10x increase in Solana’s price (from $0.04 to $0.50).
(Solana also had some other privileged/private funding rounds, at around $0.20, as well as a CoinList “auction-style” limited public token sale, which I believe was around $0.20 as well.)
Solana launched in 2020, basically near the low of BTC and ETH prices after the COVID crash. Their massive unlock coincided with a wave of new users being introduced to the crypto space. This pattern of success on various tokens and the phenomenon of “unlock to the moon” resulted in significantly higher private market valuations.
The initial sales of ETH and SOL had valuations of around $26 million. By 2021, seed rounds of new projects became highly competitive, with large VCs often engaging in bidding wars. Seed rounds reached valuations of billions of dollars.
(I remember the first time someone pitched me a $100 million seed round. I passed on it out of disgust. Later, the project opened at a $4 billion FDV, and I missed out on a 40x return. Learning from my mistake, I bought into the next $100 million seed round. But it failed and went almost to zero, and now it’s inactive.)
While private market valuations soared, in terms of the circulating market, cryptocurrency traders claim that “FDV is a meme,” and all the charts are essentially spewing out green k-bars to the sky.
Axie Infinity has a valuation of approximately $50 billion, even though only around 20% of the tokens were in circulation at the time. FileCoin’s FDV reached around $475 billion, but the market cap was $12 billion. The increase in supply of high FDV tokens was overshadowed by a huge influx of new entrants.
As the FDV reached larger numbers, venture capitalists became more willing to pay more for private rounds – “If this project is worth $15 billion in the market, then bidding $300 million for the next seed round is justifiable, missing out on it is a bigger risk!”
Founders, of course, are willing to accept these deals – they can raise more funds and sell fewer tokens. They used to have to sell 10% at a $20 million valuation to raise $2 million. Now, they can sell 1% to raise $2 million and retain additional token supply for incentives, community, or their own reserves.
If a reputable VC funds a promising project at a $100 million valuation, many less reputable VCs will try to follow suit. If the last funding round of a project was at $100 million, these baseless followers will try to lead the next round at $300 million to $500 million. Being slightly below isn’t a big problem for them – these things will reach valuations in the tens of billions regardless.
Founders can easily accept these deals. It raises their personal wealth “watermark” without relying on market forces, and it brings new team players to help them succeed. Of course, most of these team players end up being negative, but founders haven’t realized that yet.
Through this pattern, over time, more of the value and price discovery has been privately captured.
If we take the examples of Ethereum and Solana and compare them to projects launched in recent years, I would choose two comparable projects: Optimism and Starknet.
Consider the following indicators: initial sale valuation, lowest valuation in the market, circulation ratio at the time, and returns in the market versus private.
ETH ICO valuation: $26 million
Lowest market valuation of ETH: $350 million FDV
Date of lowest market valuation: October 2015
Circulation at the time: 100% supply on the market – $35 million market cap
Return from public sale: 10,000 times
Return from the market: 7,500 times
SOL seed round valuation: $20 million
Lowest market valuation of SOL: $240 million FDV
Date of lowest market valuation: May 2020
Circulation at the time: 2% supply on the market – $4 billion market cap
Return from seed round: 4,000 times
Return from the market: 300 times
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