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Token unlocks are pivotal moments in the cryptocurrency market, often causing significant price volatility.
For retail investors, this may seem like a high-stakes game. But for venture capitalists (VCs) and other institutional players receiving large allocations of project tokens, these events are carefully calculated strategic opportunities.
Understanding how these crypto giants work with token unlocks can provide invaluable lessons for ordinary traders.
At its core, a token unlock is the release of previously restricted tokens into circulation. These tokens are typically part of a project's vesting schedule, a pre-defined plan that gradually releases tokens to early investors, team members, and advisors over a set period.
The main goal of vesting is to align the interests of early stakeholders with the long-term success of the project, prevent immediate token dumps, and manage market supply.
However, despite these intentions, unlock events often lead to increased selling pressure, as the sudden influx of circulating supply can outpace demand, causing prices to fall.
You may have seen this happen repeatedly. Projects like Pyth (PYTH), Arbitrum (ARB), and Aptos (APT) have experienced noticeable price drops during their major unlock events.
Even newer tokens like Ethena (ENA) have shown similar trends. Often, experienced traders anticipate these events, leading to pre-emptive sell-offs as the market prepares for increased supply.
Venture capitalists operate with a different set of tools and objectives than retail investors. Their goal is to achieve significant returns on early-stage investments, and token unlocks are critical moments for realizing these gains.
They employ complex strategies to maximize their profit while minimizing market disruptions:
1. Over-the-counter (OTC) deals
One of the most common and effective methods for venture capitalists to offload large amounts of tokens is through OTC desks. Instead of selling on public exchanges, which can cause significant slippage and price crashes, venture capitalists make direct deals with buyers. These buyers are usually other institutions, high-net-worth individuals, or even market makers.
How it works: a venture capitalist approaches an OTC desk with a large token package to sell. The desk finds a buyer (or several buyers) and arranges a private deal at an agreed price, often slightly below the current market rate.
Benefits for venture capitalists: this allows them to avoid slippage, maintain anonymity, prevent market panic, and customize deal structures.
2. Gradual sales and phased distribution
Although it is not always perfectly timed, venture capitalists often aim for a phased approach rather than a single, large dump. They may sell portions of their unlocked tokens during market rallies, accumulating during downturns to lower their average cost. This calculated distribution aims to profit without putting excessive pressure on the market.
3. Sophisticated hedging
Perhaps the most complex venture capital strategy involves hedging the unlocked exposure. Months before an unlock, venture capitalists may enter into derivative contracts to lock in a selling price, effectively reducing their position risk.
Short futures and perpetual swaps: by taking a short position on a futures contract that reflects the token's price, venture capitalists can profit from a price decline, offsetting potential losses from their unlocked tokens.
Put options: buying put options gives them the right to sell their tokens at a specified price, regardless of how low the market may drop.
Selling call options: conversely, they can sell call options against their future unlocked tokens, earning premium income and committing to sell at a specified price if the option is exercised.
Delta-neutral strategies: venture capitalists often work with market makers to create delta-neutral positions, where they hold their tokens while simultaneously taking offsetting short positions in derivatives, ensuring profit regardless of whether the price rises or falls.
Venture capitalists do not make decisions in a vacuum. Several factors dictate their approach to unlocked tokens:
Market sentiment: if the broader cryptocurrency market is bearish or specific project sentiment is negative, venture capitalists are more likely to sell unlocked tokens to minimize potential losses. Conversely, a bullish market may encourage them to hold longer or sell more gradually.
Proportion of unlocked tokens: the higher the percentage of unlocked tokens relative to the existing circulating supply, the more likely venture capitalists (and the market) are to anticipate selling pressure.
Type of token recipient: venture capitalists distinguish between tokens unlocked for early investors/team members (who often have high profit motives) and tokens for community rewards or staking, which typically exert less immediate selling pressure.
Project fundamentals and key milestones: a project that has reached key development milestones or secured new partnerships can instill confidence, potentially prompting venture capitalists to hold the project longer or sell less aggressively.
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