Are token unlock events opportunities to short the markets? — Insights

As a perpetual short seller, I'm often searching for opportunities that allow for a quick profit through low-leverage short contracts.

One of the perks of being a short seller is that hedging your bets is much easier than taking long positions. But make no mistake, it's equally risky, even with low leverage. Overall, being extremely liquid is crucial for navigating the markets otherwise you risk being forced to close positions too early or get extremely greedy and get liquidated much often.

Moving on, with crypto developments remaining on the high side, mostly driven by VC interest in blockchain infrastructure and service projects on Ethereum, there's a consistent case of token unlocks happening almost every month through the year.

According to tokenmist, approximately $1.3 billion of ecosystem tokens were unlocked between Feb. 10-16.

This much volume hitting the market is bound to print a red candle or two, depending on how the market perceives the unlock event and sell-off. The big question is, do these unlock events typically result in a market crash?

Well, let's find out. It is crucial to understand that mere token unlock events can trigger a market crash irrespective of if the unlocked tokens actually get sold. This is simply because market participants may attempt to frontrun the “potential” sale.

Let's look at what market data says about such events nonetheless.

We will be exploring both low value and high value unlocks, considering the value-to-marketcap ratio.

RARE/USDT

Labels "TU" highlights dates of token unlocks.

RARE is the governance token of the NFT marketplace, SuperRare. Through the RareDAO, the curated marketplace for onchain art is governed by RARE token holders. The RARE token has a max supply of 1 billion, with over 803 million currently circulating. RARE's marketcap hovers around $58 million at the time of writing.

Looking at the chart above, which labels 8 token unlock events in the past year, it's evident that 4 out of 8 token unlocks events were followed by a crash.

That said, two most recent events could however be ruled out to be a general effect of recent Bitcoin performance and judging by further back unlock events, the tokens market value does not appear to be directly influenced by these events.

That said, despite these token unlocks being valued between $959.73k to $1.29 million according to Cryptorank, which represents 2.21% of the token's market capitalization, TU events did not lead to major price swings and essentially were not an opportunity for short sellers to capitalize on.

How about we look at something with a much larger marketcap and essentially volume(interest)?

APE/USDT

Similar to RARE's market performance, recent months token unlock events were followed with a crash and further back events were mostly followed by a pump or a boring stable trend.

APEcoin has a market capitalization of approximately $551 million with a much larger traders interest, evident in its $46 million 24hrs volume.

Apecoin also has a max supply of 1 billion with 752.65 million circulating, according to data from coinmarketcap.

Interestingly, APEcoin's unlock value-to-marketcap ratio being 2.14% is slightly smaller than RARE's but the actual value of the unlocked is 8.6x larger but still did not lead to any significant downward price swing.

The media often reports token unlock events are "bearish" signals. It is rather interesting to see that taking a long position on key dates would be a better bet despite fresh tokens hitting the markets.

Certainly, most higher unlock values may trigger market panics, but generally, as seen above, the market doesn't seem to really care that these often investors and team tokens are released to the market.

Token unlock events may just be a buy opportunity on Perps but I can only conclude after a look over more assets for comparison.

It is important to note that smaller projects that are funded by token emissions may post temporary bearish trends through events like this as teams more often than not, will dump the unlocks on the market.

Posted Using INLEO