Market Dynamics Around Token Unlocks

Token unlocks are more than just scheduled events; they are critical market drivers. Whether causing price suppression, volatility, or ecosystem growth, their impact is undeniable. Keyrock, a cryptocurrency market maker, published a report on token unlocks and how these events affect the market.

The research highlights that token unlocks, though predictable, have significant impacts. Leveraging insights from the study enables crypto market participants to navigate these events more effectively, transforming potential disruptions into opportunities.

Keyrock Research Unveils Insights on Token Unlocks

The study examined more than 16,000 token unlocks, shedding light on the substantial effects these events have on market behavior. The findings of the research provide valuable insights for traders and investors alike. Every week, over $600 million worth of tokens enter circulation due to unlocks. Despite their frequency, the market reaction to these events is almost uniform.

“Understanding unlock schedules is no longer optional for traders. It’s essential for timing market entries and exits effectively,” the research highlighted.

According to Keyrock, 90% of unlocks create negative price pressure. This is true regardless of the size, type, or recipient of the tokens. Interestingly, price impacts often begin well before the unlock date, likely as community members front-run the event. Bigger unlocks amplify this effect, causing sharper price drops (up to 2.4 times greater) and increased volatility.

Of note is that token unlock events typically follow structured schedules outlined in vesting tables. These schedules can range from single large releases (cliffs unlocks) to continuous monthly distributions (linear unlocks). Keyrock’s research categorizes these events by size, establishing that smaller unlocks, while less impactful individually, can create cumulative price suppression.

• Nano (<0.1%) and Micro Unlocks (0.1%-0.5%): Minimal impact.
• Small (0.5%-1%) and Medium Unlocks (1%-5%): Capable of influencing market sentiment.
• Large (5%-10%) and Huge Unlocks (>10%): Significant events with high market impact.

For traders, the size of an unlock determines its importance. Huge token unlocks, though initially disruptive, often spread their effects over time, leading to a more gradual price recovery.

Besides size, the type of recipient receiving the unlocked tokens also significantly influences price dynamics. Assessing the unlock recipient’s profile is crucial for determining the potential market impact.  Keyrock has identified five primary categories in this context.

Team Unlocks

These are the most detrimental, leading to average price drops of up to 25%. Uncoordinated selling by team members, coupled with a lack of strategic measures to minimize market impact, exacerbates the situation. Often treated as compensation, these tokens are sold quickly to address financial needs, resulting in sharp price declines.

“Team unlocks exemplify how lack of planning can amplify market disruption,” the report noted.

Therefore, traders should avoid entering positions during these unlock periods or even during the linear distribution that often follows.

Investor Unlocks

Managed strategically and exhibited controlled impacts due to advanced hedging and liquidation strategies. Interestingly, investor unlocks exhibit more controlled price behavior compared to team unlocks.

Early investors, often from venture capital (VC) backgrounds, employ advanced strategies such as OTC deals, derivatives, and options to mitigate the impact of token sales. These methods reduce immediate sell-side pressure and ensure orderly market conditions.

Keyrock’s research points out, that the adoption of similar strategies by project teams could significantly reduce the negative impacts of token unlocks.

“Sophistication in planning and execution can turn unlocks into opportunities rather than liabilities,” Keyrock added.

Ecosystem Development Unlocks

Uniquely positive, these often result in price increases (+1.18% on average) as they inject liquidity or incentivize ecosystem growth. The tokens typically serve for infrastructure development, contributing to long-term ecosystem growth.

Keyrock cites the example of Optimism (OP), which strategically allocated $36 million in tokens to 24 projects following a major unlock in June 2022. This approach not only stabilized the market but also drove network expansion.

“Unlocks aligned with ecosystem growth strategies can act as catalysts rather than disruptors,” Keyrock said.

Community or public unlocks often exhibit mixed impacts, with many tokens held or sold by recipients, reflecting moderate price pressures. On the other hand, burn unlocks are rare and, therefore, excluded from the analysis.

Key Takeaways: Patterns and Strategies Around Unlocks

Meanwhile, two phenomena frequently drive pre-token unlock price suppression. First, is retail anticipation, where traders sell early to avoid dilution, further driving down prices. Second, is institutional hedging, where sophisticated holders preemptively lock in prices, minimizing their impact on unlock days.

Post-unlock, prices often stabilize within two weeks as market dynamics adjust. For ecosystem development unlocks, the stabilization is coupled with tangible growth benefits, as seen in projects like Optimism, which effectively used token unlocks to fund ecosystem expansion.

“Optimism’s strategy following its aggressive June 2022 unlock offers a textbook example of how ecosystem unlocks, when well-designed, can drive both immediate utility and long-term growth. Despite an initial selloff, Optimism demonstrated how aligning unlocks with targeted incentives can transform a supply shock into a springboard for expansion,” an excerpt from the research stated.

eyrock’s research highlights the importance of monitoring unlock schedules and understanding recipient behavior. For traders, timing is crucial. Exiting positions 30 days before major unlocks and re-entering 14 days later can reduce risks and maximize returns. For projects, carefully planned unlock schedules and strategies, such as phased releases and liquidity support, can minimize market disruptions and align with long-term growth objectives.