Taking Advantage Of Token Unlock To Make Profit And Things To Note
Token Unlock refers to the process of unlocking blocked tokens under the terms of any fundraising round or other fundraising programs of the project.
Each project carefully plans its tokens to avoid undue pressure from merchants during the unlocking process and to prevent a drop in the price of the token. Also, most of the funding comes from the initial investors who buy the token at the lowest price.
In short, the unlocking increases the supply of tokens in circulation and is closely watched for the impact on the price. The project’s team sets up several features for the upcoming token unlock to avoid a dump:
Meaning of Token Unlock
Token distribution is an essential process in the token management of a blockchain project. Token distribution is vital to many stakeholders, including investors, teams, users, and the community.
- For investors: The token payment plan will help them determine when to change the supply of tokens. From there, analyze the entry and exit points in investment activities.
- For the team: This is the token part for the team to motivate the members. The number of rewarded tokens can be locked for a certain period to ensure fairness and motivation of project members.
- For the community and users: The distribution of tokens plays an important role because this is a way to create trust and support from the community for the project. For DeFi projects, the native token also represents the community’s voting power for the project they support.
- For projects: In some projects, native tokens are important in operating the network. Therefore, the issuance of tokens is also a way to promote the sustainable operation of the project.
Linear Unlock and Cliff Unlock
Linear unlock and Cliff unlock are two different methods for distributing and unlocking tokens to investors or team members in a blockchain project. Both these methods have the following differences.
The linear token unlock method allows a number of tokens to be unlocked on a linear schedule, such as monthly or yearly, over a certain period of time. The advantage of the Linear Unlock method is that it creates stability for the token in the market, minimizes oversold, and helps build confidence among investors.
The Cliff token unlock method allows a certain amount of tokens to be unlocked immediately after a certain period, usually after a predetermined period of time like 6 months to 1 year. Tokens will then be unlocked according to the Linear Unlock schedule.
Some advantages of the Cliff Unlock form:
- For the project: This way of unlocking the token allows the project to control and limit the source of token circulation in the market during the time before the beginning of the Cliff time (the time to pay the token).
- For investors who accept to receive tokens by Cliff unlock method (usually seed/private investors), they will receive a large number of tokens when Cliff starts.
- However, Cliff unlock also has some limitations for the project and investors: From the moment the cliff unlock begins, there is usually a significant amount of tokens paid out. This rapidly increases the token circulating supply, thereby creating a certain selling pressure.
What drives the token price to increase prior to unlocking?
Token unlocks have historically been considered bearish events, representing an increase in circulating supply. Newly released digital assets infiltrate the circulating supply, creating selling pressure and thus devaluing existing prices. As a general rule of supply and demand, the more supply, the lower the demand, which reflects falling prices.
New upcoming token releases allow early investors, developers or other holders to sell their assets while prices remain high. Since the market is speculative, the price increases before unlocking the token. The positive momentum can be bolstered by the excellent news that token issuers have been holding back for months.
On the other hand, another fundamental factor determines which direction the price of the token can move after unlocking. This is the allocation by which the unlocked tokens will be distributed.
Tokens are distributed to the protocol’s treasury or for further project development, which usually means that they will stay in the ecosystem and will not be sold immediately for a profit. Meanwhile, tokens unlocked and distributed to partners, advisors, or early investors on a large stake risk creating higher selling pressure.
How to earn with unlock tokens
Short selling unlocking tokens is a strategy where a trader opens a short position before unlocking the token to profit from falling prices. Information about the token unlocking can be found in the project’s White Paper and Tokenomics which are publicly available. There is also the Internet resource Vestlab, where developers organize information about unlocking into a special table.
Here are some factors that can cause the price to drop significantly after unlocking the token:
- Low entry price for investors and high current rate of return at the time of unlocking;
- The liquidity of the trading pair is poor and the number of buy orders is small;
- Large unlock volume relative to market cap;
- Presence of “speculators” among investors – funds with poor reputation, selling their coins immediately after unlocking the token.
Another factor to consider is the circumstances involving force majeure, so the price of the token may not react to the massive unlock. These situations could be a strong market maker, investors’ confidence in the project, or they simply don’t want to sell coins.
As a result, unlocking a short sale is a challenging strategy that requires extensive cryptocurrency experience, strong analytical abilities, practical knowledge of futures and margin trading, as well as the use of Use special orders to reduce risk.
As such, token unlock is distributing tokens to investors, project members, and the community. However, hidden deep in it is possible that there is a risk of token inflation or a decrease in token price after unlocking due to a sudden increase in supply.
In some cases based on this very factor, investors can use a short-selling strategy to make a profit. However, it is not advisable to rely solely on token unlock information to decide to short 1 coin/token. Token unlock will increase the circulating supply of the token, but it is unlikely that the token will be inflated or depreciated if there are effective tokenomics. Token unlock just one of the few factors affecting the price of tokens besides the macro situation, tokenomics policy, etc.
Blockchain projects often apply methods such as linear unlock or cliff unlock to ensure the distribution of tokens takes place in a reasonable and sustainable way. Having a clear understanding of the meaning of unlocking will help investors and holders make smart investment decisions and use their tokens.
DISCLAIMER: The information on this website is provided as general market commentary and does not constitute investment advice. We encourage you to do your own research before investing.