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Who is to blame for the underperformance of low-float, high-FDV tokens?
Posted May 21, 2024 at 10:19am EST.
Last weekend, a Binance report on tokens with fully diluted high valuations and low initial circulating inventories, also known as “low float, high FDV” coins, sparked interest in the cryptocurrency community.
After numerous response tweets and longer articles from crypto OGs like Cobie, Haseeb Qureshi and others, on Monday, Binance also responded to concerns about the growing trend of announcing a strategic shift towards the listing of small and medium-sized projects.
The reason for the controversy is that tokens with low float and high FDV often leave little margin for traders after the token generation event (TGE). Analysts differ on why the price of these tokens has fallen in recent months, with some pointing to VCs and others to market conditions. Meanwhile, there is no agreement on a solution for how to distribute tokens whose value does not immediately drop.
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Binance’s report was released on Friday highlighted the negative impact of low-float, high-FDV coins on retail investors and loyal community members. “Should such a trend become an industry norm, sustainable growth will be increasingly difficult without a corresponding capital inflow to match the billions of tokens unlocked in the coming years,” they wrote.
Shortly after Binance released its report, SwissBorg researcher “tradetheflow” sparked a broader discussion publication on X: “Yes, in most cases, tokens launched on Binance are no longer an investment vehicle – all their upside potential has already been taken away.” He also noted that prices of new tokens listed on Binance over the past six months have declined since then, with the exception of five coins, three of which were memecoins (only one of which had VC investors but “[n]or tier 1 VC”), and JUP and JITO, whose gains he attributed to “[b]ig Solana momentum.”
OG cryptos are heavy and divided
In a substack post published on Sunday, Jordan Fish, aka “Cobie,” wrote that most of the upside in new tokens is now privately captured before they even exist, leading to inflated valuations, little for public market participants, and even “ghost markets” where traders Investors with locked tokens are selling their tokens at massive discounts to the public price, indicating a dislocation between the public and private markets. Cobie wrote that “new launches have become uninvestable” and called on investors to forego purchasing inflated FDV tokens.
As an example, he cited the fact that Ethereum’s Initial Coin Offering (ICO), which was public, was around $26 million, while the following seed rounds had these fully diluted values: Solana, ~$20 million FDV; Optimism, ~$60 million FDV; StarkNet, ~$80 million FDV. He then noted that “modern seed rounds for comparable projects now amount to an FDV in excess of $100 million.”
In other words, he observed that the Ethereum ICO returns were 1.5 times higher than those available on the market, while the Solana seed round returns were 10 times higher than those available on the market, the seed round returns of OP were 30 times higher and STRK’s seed round yields “are infinitely higher than those available in the market, because today is the lowest price ever for STRK, which means all public market buyers have lost money , but the seed increased 138 times.” He concluded: “As you can see, returns are increasingly being captured privately.”
He said the main problem with low-float, high-FDV coins is that “the price discovery actually took place in a private market that is rigged, delusional, or both.”
Learn more: What is Tokenomics? A beginner’s guide
On the other hand, in an 11-minute long read on X, Haseeb Qureshi, managing partner of cryptocurrency firm Dragonfly, examined three theories as to why low-float, high-FDV tokens are struggling: VC dumping, retail investors favoring memecoins, and inadequate supply for pricing. After a detailed analysis with charts debunking each of these theories, Qureshi showed a chart starting in late 2023 (a shorter time period than Cobie’s analysis) of how the prices of all coins listed on Binance ( and analyzed by Swissborg’s tradetheflow) took a nosedive in mid-April. “For the first two months, these tokens mostly traded flat relative to their listings until mid-April,” he wrote. “Suddenly Iran and Israel began threatening World War III and the markets collapsed. Bitcoin has recovered, but these coins have not.”
Furthermore, Qureshi pointed out that the Binance chart that has been dominating Crypto Twitter is wrong: “My brother in Christ, I was around in 2022, projects were not launching with 41% circulating supply.”
Is there a solution?
Addressing the issues surrounding low float and high FDV tokens has sparked various suggestions from industry experts. In his article, Qureshi reviewed several proposed solutions, including reinstating ICOs, immediately unlocking 100% of tokens, using bookrunners like traditional IPOs, and listing tokens at lower prices. However, he found these solutions impractical or ineffective. Instead, Qureshi suggested that free markets would naturally correct pricing errors over time, saying that market forces would push for lower FDVs, exchanges would adjust their listing strategies, and VCs would communicate realistic valuations to founders. “[I]If you’re a team whose token has gone down, don’t worry,” he wrote. “You’re in good company. Remember: AVAX was down 24% about 2 months after listing. SOL was down 35% about 2 months later the stock fell by 47% approximately 2 months after listing.
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Rob Hadick, general partner of Dragonfly, underlined the need for a fundamental change in how tokens are issued and valued: “The best way to solve this problem is to move towards a variable supply of tokens in protocols subject to governance for new issues (versus a fixed supply ).” Hadick argued that the current system incentivizes short-term gains and harmful behavior by founders and VCs, hurting retail investors and pushing them into memecoins. By increasing the percentage of liquid tokens at launch and adopting a variable supply approach, he said he believes the market can foster healthier dynamics and solid price discovery.
Wassielawyer, a cryptocurrency lawyer, had a new idea: “Maybe low and high float FDV coins should move to price based unlocks versus time based unlocks. A very crude tool, but if people know that VCs can’t start selling up to 1 billion FDV instead that 3 months after the TGE, there will be a little more alignment”.
Davo, head of housekeeping at Solana-based dapp Drift, suggested another potential solution: launching the tokens during the last private evaluation round. “A project that launches with a low FDV and allows the community to buy at reasonable prices will be much more anti-fragile and resilient than the community member who buys for hype at an inflated price only to experience only downside action ,” he wrote. By aligning the launch price with the latest private valuation, he said he believes the projects can avoid artificially inflated prices and ensure that early backers benefit from the project’s success.