What is the impact of token unlocks on price? The 1% rule: Over 1% unlock will cause the price to drop.
The cryptocurrency venture 6MV conducted an analysis of the allocation and unlocking times of the 20 most representative tokens in the past, attempting to find out the impact of token unlocking on prices. It was found that if a single token unlocking event does not exceed 1% of the total amount, it is helpful in maintaining the token price.
Table of Contents
Analysis Sample
6MV selected 20 protocol tokens, including tokens like UNI, POOL, LIDO, etc., and analyzed a total of 5,000 token unlocking events.
Insights of Token Unlocking
Token Unlocking Leads to Price Decline
The first conclusion is not surprising at all: token unlocking results in a price drop. The analysis team tracked the prices 15 days before and after the unlocking date and found that regardless of the average or median price (the team believes the median is more reliable to reduce the impact of extreme cases), the token price decreases during this period.
The price drop in the first 15 days may be due to investors' expectations, as most unlocking information is public; the drop in the following 15 days may result from the selling pressure of unlocked tokens. In general, the token price usually decreases by around 10% to 15% before and after token unlocking.
Internal Team Unlocking Has a Greater Price Impact
Token unlocking usually falls into two categories:
- Community Unlocking: Includes token airdrops, community rewards, ecosystem fund unlocking, etc.
- Team Unlocking: Includes internal team quotas, core contributors, early investors unlocking, etc.
The analysis team found that in general, the share of community unlocking is relatively less compared to team unlocking, with the unlocking percentage usually staying below 2%. Data also shows that community unlocking has a smaller impact on token prices.
On the other hand, team unlocking events usually involve a larger token share and longer unlocking intervals, which aligns with the data showing that team unlocking events have a greater impact on prices.
The difference between them lies in the quantity of tokens being unlocked.
1% Unlocking Token Quantity as a Turning Point
For unlocking events with a token quantity less than 1%, the analysis team found no linear relationship between the unlocking ratio compared to the total token quantity and the token price change compared to the day before unlocking. This suggests that unlocking events with less than 1% token quantity do not significantly affect prices, indicating that the market seems indifferent to small token unlocking events, and the world continues to operate as usual in terms of project valuation.
For unlocking events with a token quantity greater than 1%, the team found a negative correlation coefficient of 16% between the unlocking ratio and token price change, indicating that the token market is more sensitive to events where 1% or more of the tokens are unlocked, leading to a price decline due to unlocking.
However, the above analysis only focuses on price changes the day before unlocking. Therefore, the analysis team further examined the correlation between price changes and unlocking ratios three days, seven days, and fifteen days before and after unlocking, yielding similar conclusions.
Whether it's three days, seven days, or fifteen days, unlocking events with a single unlocking ratio less than 1% typically show no significant correlation with prices; whereas for events with a ratio greater than 1%, a clearer conclusion was found: token price changes after unlocking are negatively correlated with the unlocking ratio.
High Unlocking Frequency Can Reduce Price Decline
The analysis team attempted to simulate the impact of token distribution frequency on prices. Four scenarios were simulated:
- No token distribution to teams or institutional investors. Upper left
- 8% token distribution: unlocked daily. Upper right
- 8% token distribution: unlocked monthly. Lower left
- 8% token distribution: unlocked semi-annually. Lower right
The simulated results align with the above data, showing that the larger the single unlocking amount, the greater and longer the token price decline.
Critical Point of Token Unlocking: 1%
In conclusion, the 6MV team summarized recommendations for project teams and ecosystem participants:
1% Rule: To reduce token price volatility, project teams should reduce the proportion of tokens unlocked in a single event. Besides staying below 1% as a prerequisite, they can also consider daily unlocking to mitigate the impact of large-scale unlocking events.
Of course, other market factors need to be considered, such as team coordination with the unlocking date to announce project updates, fundraising, etc., or the overall market environment. However, this rule can serve as a reference point to provide more considerations for market judgment.