- The launch of tokens before projects reach sufficient maturity is as crucial as avoiding high fully diluted valuations (FDV).
- Several factors contribute to the popularity of high FDV in the crypto market, impacting how these projects are perceived and valued.
- One fundamental issue is the market’s anchor bias, where initial high valuations set unrealistic expectations.
Understanding the Risks Behind High FDV in Crypto Projects
Analyzing the Market’s Anchor Bias and Overvaluation
The story of Icarus and Daedalus from Greek mythology serves as a poignant analogy for the current cryptocurrency cycle. Icarus, driven by the exhilaration of flight, flew too close to the sun, which melted the wax of his wings, leading to his downfall. Similarly, numerous crypto projects get seduced by alluring high valuations, only to find themselves crashing due to overblown promises and unsustainable market expectations.
In the current crypto ecosystem, we can observe the phenomenon where project founders set exorbitant FDVs based on their perception of the project’s worth. This leads to market expectations built on these inflated valuations. Even if the token price depreciates by 90%, it tends to stabilize at what founders believe is its “true value.”
The Impact of Venture Capital (VC) Valuations
The influx of VC money in 2021 and 2022 resulted in sky-high valuations in the private market. Projects attempting to go public find themselves compelled to match or exceed these valuations, often to avoid the stigma of launching at a lower value than their last private funding round. This pressure leads to inflated public tokens, creating a precarious situation for both retail investors and the projects themselves.
Implications of High FDV on Project Dynamics
High FDVs can give projects the appearance of immense success, attracting more participants due to the perceived value. However, this often leads to a skewed cost and supply distribution between early investors and liquidity providers at TGE (Token Generation Event).
Projects need considerable resources to hire top talent, fund ecosystem grants, and foster partnerships, which are often scaled based on their inflated market caps. This “paper wealth” can create growth incentives but tends to delay genuine market price discovery, leading to long-term market adjustments that can be painful for investors and project stakeholders.
Case for Market Maturity Before Token Launch
Releasing tokens with high FDV prematurely can hinder a project’s growth potential. A token should be introduced when the project has clear signs of market product-market fit (PMF). The focus should be on substantial circulating supply—ideally 20% to 50% of the total supply—to facilitate effective price discovery.
The Role of Liquidity Funds
Liquidity funds can play a crucial role in the post-TGE phase by assuming the risk and assisting in accurate price discovery. Unlike VCs, liquidity providers engage more actively in the market, thereby providing a stabilizing force and contributing towards maintaining a healthier valuation framework.
Conclusion
In conclusion, navigating the crypto market requires a measured approach to token valuation and timing. High FDV, while appealing in the short term, can lead to significant long-term setbacks. Projects must avoid the pitfalls of hasty token launches and inflated valuations, aiming instead for sustainable growth and a balanced market presence.
