The Wolf Den #971 - The Ugly Truth Behind Tokenomics
The Wolf Den #971 - The Ugly Truth Behind Tokenomics
Low Float And High FDV
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In This Issue:
The Ugly Truth Behind Tokenomics
Bitcoin Thoughts And Analysis
Altcoin Charts
Legacy Markets
The SEC’s Trojan Horse Has Arrived
THE SPOT ETH ETF MAY BE APPROVED
Grayscale Ushers In A new CEO
Everything Happening In DC This Week!
This One Thing Could Spark The Next Huge Bitcoin Rally
The Ugly Truth Behind Tokenomics
The Ethereum ETF is the biggest news right now, covered in detail below in the news section. However, I have another important topic to discuss up here. I suggest you read both.
Tokenomics have suddenly become a major concern for everyone in crypto.
Between angry yield farmers discovering they weren’t getting paid for their efforts, the followers of Cobie who just read his new Substack article titled, “New launches (part 1) - private capture, phantom pricing,” and the casual altcoin collectors dabbling in shitcoins, everyone seems to be outraged and aware of tokenomics all of a sudden.
This isn’t a new problem, but it is worth discussing.
It’s become the norm for tokens to launch with just a sliver of their total supply available to the community, stretched out over a very long period. Sure, this setup benefits the team and early investors, but for the average investor waiting for their chance in the aftermarket, the once promising rose has turned smelly and brown.
Here’s a quick rundown of some key terms you might encounter in these discussions:
Float in Crypto: The number of tokens available for trading on the market, excluding those locked up, staked, or held by insiders and early investors.
Low Float: Only a small percentage of the total supply is available for trading, leading to higher price volatility as limited supply can cause significant price movements.
Fully Diluted Valuation (FDV) in Crypto: The market capitalization of a cryptocurrency if all possible tokens were issued and outstanding, including those locked, vested, or reserved for future issuance.
High FDV: Indicates that the potential market cap, considering all possible tokens, is significantly higher than the current market cap. This often happens when a large portion of the total supply is not yet in circulation but will be released over time.
These concepts are straightforward on their own. The discussion becomes murky when we start labeling these practices as 'good' or 'bad' ethics, often without context and nuance. If the ethics interest you, there are plenty of long-form articles that explore the topic in depth. They aren’t too hard to find with a Google search.
Today, I will be broadly criticizing newer projects that have chosen the low float and high FDV route, which will inevitably disadvantage most retail investors over time. This doesn't mean these projects are doomed to fail, but their path to success will be more challenging.
Remember, both Bitcoin and Solana had low floats at one point, and look at them now. There's no hard and fast rule here.
Binance recently released a report titled, “Low Float & High FDV: How Did We Get Here?” which I'll be sharing some interesting commentary and visuals from. It's ironic to see Binance bring this up, considering the platform has listed plenty of tokens with these exact problems. But that's a conversation for another day.
The following two charts tell a concerning story.
Point 1: Low Float Directly Inflates FDV
Limited circulating supplies result in higher initial token prices due to restricted liquidity, consequently increasing fully diluted valuations. These new token launches shouldn't even come close to the top ten tokens' median FDV (excluding BTC, ETH, and stablecoins), let alone surpass the average.
Point 2: Selling Pressure from Token Unlocks
According to a report by Token Unlocks, it is estimated that roughly US$155B worth of tokens will be unlocked from 2024 to 2030. While this may not matter if capital inflows outpace scheduled releases and sales, that tends to be the exception rather than the rule.
Interestingly, memecoins don't face this issue. While memecoins have their own set of problems, they typically don't have vesting schedules, unlocks, or private sales. Memecoin investors are spared from the dilution of their holdings because they have a market cap to FDV ratio of 1 at launch. Retail investors have shown significant interest in memecoins, even if the tokens may lack utility.
How Did We Get Here?
The proliferation of private markets has led to this situation. Early investors (VCs) prioritize high valuations and quick returns, and low floats and high FDV help achieve these objectives. This structure inevitably disadvantages retail investors over time.
It's remarkable how low VC funding is currently, especially given the stage of the cycle we're in. This suggests a focus on institutions rather than VCs, or that this cycle is lasting much longer than anticipated. The answer likely lies somewhere in between.
The current altcoin landscape requires closer scrutiny than ever before. While tokenomics play a crucial role, they must be seriously considered alongside valuations, leadership, vision, and market fit. Tokenomics alone do not determine the success or failure of an asset, but they can either lighten the project's load or act as a burden.
Projects operating in a low float, high FDV structure face more pressure to succeed today than altcoins from previous cycles. As the Binance report summarizes, projects with inflated valuations will have to justify the premium in future private rounds or in the public market. Failing this, token prices will likely trend lower towards their true value. Sustainable growth will be increasingly difficult without a corresponding inflow of capital to match the billions of token unlocks in the coming years.
If the money printer goes brrrr and the cycle shifts into high gear, none of this will matter much, at least not for a year or so. Those who didn't blindly ape into these projects will be seen as the ‘mid curve,’ and my commentary will be seen as a faux pas. Just another example of something I'd prefer to be wrong about and to exercise caution on in the meantime.
There's a lot going on in DC this week, so be sure to tune in daily for important updates on everything unfolding. Fingers crossed for confirmation of an ETH ETF. Maybe the money printer will go brrrrr.
Bitcoin Thoughts And Analysis
What a move. Bitcoin skyrocketed yesterday, finally breaking through the key resistance at the EQ (equilibrium, dashed centerline) of the trading range. The more times a horizontal resistance is tested, the more likely it is to break as supply is removed from the area. We had 3 daily candles attack that area before the break above, which happened in spectacular style. As you know, we had a strong showing at support at the range lows, when people predictably turned bearish and thought the bull market was over. Trading Alpha gave the clear buy signal above support a few days ago, after the squeeze shading (yellow) and grey dots arrow. Beautiful.
Now people will inevitably become extremely bullish as we approach resistance.
This move was amazing, and this could be the precursor for new highs. But remember - now chopping in the top of the range is also highly likely.
The great news is that altcoins flew alongside bitcoin, led by Ethereum… finally. I have never lost my conviction on that trade, saying that the fact that ETH was lagging was an opportunity. That opportunity presented yesterday with a 20% upside move. I wrote an entire newsletter on ETH yesterday before the move!
Be patient!
Altcoin Charts
For those who are new here, I share SETUPS and not SIGNALS. These are ideas that I am watching - if a certain thing happens, then the trade triggers. I am not telling you what to buy or when. I am showing you how I am watching certain charts and what has to happen for me to take a trade.
What a difference a day makes. I have been consistently bullish on ETH, believing it would eventually have an explosive move and steal the show. How about a 20% day? As you can see, ETH broke out of the massive bullish descending channel and huge volume. Trading Alpha once again gave the perfect signal, with the grey arrow, squeeze shading and break above the trackline. What a monster move from Ethereum.
I think it is just getting started…
EVERYTHING ELSE
Instead of sharing a bunch of charts, I can sweepingly say that the altcoin market starting looking very bullish yesterday. I did a full stream on YouTube looking at tens of tokens, so easier to watch it quickly…
Legacy Markets
European stocks declined on Tuesday as investors awaited Nvidia's results, causing the Stoxx 600 index to fall by 0.4%. Notable drops included GSK Plc, which faced a costly whistleblower lawsuit, and Palo Alto Networks Inc., which fell 8.5% in premarket trading due to a disappointing forecast.
Despite the Bloomberg Commodity Spot Index reaching a 15-month high, the surge in commodity prices hasn't shaken confidence that inflation will continue to ease, potentially leading to interest rate cuts by major central banks. Investors are focused on Nvidia, which has significantly contributed to the S&P 500’s earnings surge. Nvidia's stock rose 2.5% on Monday, boosting the Nasdaq 100 to a new record high.
Jason Draho of UBS Financial Services noted that macroeconomic support and Nvidia’s upcoming earnings could further fuel market gains. However, with markets near record highs, there is a risk of profit-taking. Central bank officials, including Fed Governor Christopher Waller, are set to speak, with their comments highly anticipated following less optimistic remarks from Cleveland Fed President Loretta Mester about the scope for rate cuts.
Trading volumes have decreased, with the New York Stock Exchange seeing the lowest transaction value this year on Monday. Crypto prices surged on potential US approval of Ether ETFs. Meanwhile, Chinese shares fell due to ongoing issues in the country's debt-laden property sector.
Key events this week:
Fed’s Thomas Barkin, Christopher Waller, John Williams, Raphael Bostic, Susan Collins, Loretta Mester speak, Tuesday
US existing home sales, Wednesday
Fed minutes, Wednesday
Nvidia earnings, Wednesday
Eurozone S&P Global Services PMI, S&P Global Manufacturing PMI, consumer confidence, Thursday
G-7 finance meeting in Stresa, Italy, May 23-25
US new home sales, initial jobless claims, Thursday
Fed’s Raphael Bostic speaks, Thursday
US durable goods, University of Michigan consumer sentiment, Friday
Fed’s Christopher Waller speaks, Friday
Some of the main moves in markets:
Stocks
The Stoxx Europe 600 fell 0.4% as of 10:14 a.m. London time
S&P 500 futures were unchanged
Nasdaq 100 futures fell 0.1%
Futures on the Dow Jones Industrial Average were little changed
The MSCI Asia Pacific Index fell 0.7%
The MSCI Emerging Markets Index fell 0.7%
Currencies
The Bloomberg Dollar Spot Index was little changed
The euro rose 0.1% to $1.0871
The Japanese yen was little changed at 156.15 per dollar
The offshore yuan was little changed at 7.2432 per dollar
The British pound was little changed at $1.2717
Cryptocurrencies
Bitcoin rose 2.1% to $70,974.87
Ether rose 4.7% to $3,665.7
Bonds
The yield on 10-year Treasuries declined two basis points to 4.43%
Germany’s 10-year yield declined two basis points to 2.51%
Britain’s 10-year yield declined three basis points to 4.14%
Commodities
Brent crude fell 0.9% to $82.93 a barrel
Spot gold fell 0.3% to $2,417.81 an ounce
The SEC’s Trojan Horse Has Arrived
In the process of picking and preparing news stories, I wrote a frustrating segment on Prometheum, the SEC’s trojan horse. They launched an Ethereum custody service and subsequently labeled Ethereum a security before the ETF news dropped. For reference, Prometheum was relatively unknown but suddenly gained attention when invited to present at Capitol Hill. It echoed the SEC's messaging and became the first crypto-focused broker-dealer registered with the SEC.
I’ll keep some of the content I wrote, but the real news is below all of this (in the next segment): Prometheum didn't just launch an Ethereum custody service—they declared Ethereum as a security. The CEO of Prometheum told Fortune, “It eliminates a lot of the arguments that things can’t be done under existing laws. It marks the first time that…an investment contract digital asset security is being custodied and treated under the securities laws.”
On its own, I would say this story doesn't bode well for the approval odds this coming week, but things are changing regarding the spot Ethereum ETF. Proceed to the next story.
THE SPOT ETH ETF MAY BE APPROVED
This isn't just massively positive for Ethereum; if true, it could indicate seismic shifts within the SEC and/or the Biden administration.
One important technicality to remember is that approval is a two-step process. The same procedure was followed for Bitcoin. The first step is the 19b-4 filing, followed by the S-1 filing. If the SEC approves the 19b-4, we can reasonably expect the ETF to be approved, with some time needed for the S-1 to complete the process.
The odds on Polymarket are going haywire, so be cautious when betting there, as I don't fully understand the nuances of what constitutes approval for the bet. If these rumors are true, a lot will unfold in the next couple of days. An approval would be a huge catalyst to end the prolonged negativity and spark new narratives and sentiments.
Last point: If the approval is happening, nothing is official until it starts trading. I expect ETH to follow a similar price trajectory as BTC. There will likely be some degree of Grayscale selling. ETHE has $10 billion in AUM, much of which was bought at a discount, waiting for the gap to close on an approval. Institutions will want Ethereum, but we'll have to wait and see how much. Just wait until staking is added; Wall Street loves yield.
Grayscale Ushers In A new CEO
After a decade of service at Grayscale, CEO Michael Sonnenshein is stepping down. He will be succeeded by TradFi veteran Peter Mintzberg, formerly the head of strategy for asset and wealth management at Goldman Sachs. Mintzberg is set to assume his new role on August 15. In the interim, CFO Edward McGee will step in as needed to lead the company.
The reasons behind Grayscale's decision are unclear. It may simply be a desire for fresh perspectives or a personal choice by Sonnenshein. There is no indication that this change is related to GBTC fees, an Ethereum ETF, or any potential acquisition of Grayscale. Michael Sonnenshein deserves a lot of credit for transforming Grayscale into the behemoth it is today.
Wishing Michael Sonnenshein and Peter Mintzberg the best of luck.
Everything Happening In DC This Week!
SAB 121 is on President Biden’s desk, FIT21 (the Financial Innovation and Technology for the 21st Century Act) is being voted on in the House this week, and, as mentioned above, Tom Emmer’s CBDC Anti-Surveillance State Act will also be voted on. Meanwhile, the SEC is making moves on the Ethereum ETF. With so much happening, it’s hard not to feel euphoric about the possibility of entering the next 'up' stage in this market.
This One Thing Could Spark The Next Huge Bitcoin Rally
Join Dave Weisberger, Mike McGlone, and James Lavish as we break down what's happening in macro and crypto!
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