Deep Dive into Token Unlocking: What is the Most Critical Factor for Price Movement?

Original Article Title: From Locked to Liquidity: What 16,000+ Token Unlocks Teach Us

Original Source: Keyrock

Original Translation: Felix, PANews

Key Points:

· Over $600 million worth of tokens are unlocked weekly

· Regardless of scale or type, 90% of unlocks result in negative price pressure

· The price impact of tokens typically begins 30 days before the unlock event

· Larger unlocks lead to significant price drops (2.4x) and increased volatility

· Team unlocks trigger the most severe collapses (-25%) and irrational selling

· Investor unlocks show a controlled price performance as they adopt wiser strategies, minimizing the unlock impact on the market

· Ecosystem development unlocks are one of the few factors with a positive impact (average +1.18%)

Introduction

Over $600 million worth of locked tokens are unlocked weekly (equivalent to Curve's market cap). These tokens are usually released at scheduled intervals, flowing into the hands of different parties. The scale and intervals of these unlocks, expectations and dates, as well as the recipients of these tokens, all have an impact on token value and the market.

In a crypto space dominated by short-term decision-making and rampant profit-taking behavior, the pace and structure of token unlocks are crucial to ensuring long-term value capture and increasing holder satisfaction. Unlocking is not a novel concept. In the traditional financial realm, mechanisms such as equity ownership have long been used to incentivize employees to hold long-term. However, in blockchain projects, the methods, frequency, and impact of token unlocks vary widely.

In the analysis of 16,000 unlock events in this article, a striking pattern emerges: unlocks of all types, scales, and recipients almost always have a negative impact on price.

This article takes a trader-centric approach, examining some of the most prominent token unlocks of the past few years. It analyzes how unlocks of different scales and recipient types influence price, identifying recurring patterns and key behavioral differences in the entire ecosystem.

Understanding Vesting

As a trader, you cannot see the overall retail buy or sell decisions, but you can get insights into another set of holders, namely those listed on the vesting schedule. The vesting schedules are crucial to unraveling the mystery, not only implying future supply shocks but also serving as a leading indicator of sentiment and volatility.

Most vesting schedules look like the table above: a long-term calendar with markers for "Cliffs" and "Linear or Batch Unlock Blocks." These blocks are designated to different recipients—categories like "Seed Investors," "Core Contributors," or "Community."

Designing vesting is a delicate task for any project. You cannot simply pre-allocate all tokens upfront as recipients may leave and sell them. But you also cannot make them wait too long, or they may consider the project not worthwhile. The project must strike a balance: incentivize recipients to stay engaged in the early project development while also keeping them involved long-term. The typical solution is to gradually distribute tokens over the designated vesting period.

A typical vesting might look like this: the vesting period starts from the relationship between the recipient and the organization and continues until full allocation. For most crypto projects, these are outlined early in the whitepaper. Within the first ⅓ ± ¼ of the vesting period, there may be no distribution. Then, a large chunk of tokens may be released at once, followed by a linear unlock over the remaining time.

This approach is effective because it ensures that recipients make minimal commitments before receiving rewards. For example, developers are incentivized to continue their involvement, while investors face an initial lock-up period, followed by partial cash-outs. A gradual unlock can alleviate market pressure.

Not all vesting follows this structure. Some are called "Batch Unlock," releasing all tokens at the end of Cliffs. Others are purely linear, starting with no Cliffs, regularly distributing tokens until full allocation.

Vesting Size, a Key Element of Price Dynamics

This article first breaks down the vesting period of 16,000 composite events and categorizes each event by size. For each event, daily token prices were tracked for the 30 days before unlocking and the 30 days after unlocking. Additionally, the median price and volatility indicators for each token were tracked for the 30-day pre-unlock period. This is crucial as many projects adopt a monthly unlocking schedule. This method is not perfect but can better isolate smaller-scale unlocks.

Finally, no asset can exist independently of the market. This is especially true for altcoins, which tend to exhibit extreme beta correlation with their protocol tokens. To illustrate this point, this article standardized the price changes in each unlocking event's data series.

For simplicity, this article chose ETH as the base and then weighted the prices in the sample (pre-, during, and post-unlock events) against ETH to derive a more market-independent metric.

Unlock Scale Does Not Tell the Whole Story

After breaking down, categorizing, and quantifying unlock events, plotting the average price impact at various time intervals post-unlock date. When visualized, the data appears messy. You might expect a proportional relationship between unlock scale and price impact, but the correlation weakens after 7 days.

When scaled by relative magnitude, most unlocks appear similar in terms of the degree of price suppression they cause. Instead, frequency is a more telling factor. As mentioned earlier, unlocks typically occur as a single large batch post the initial cliff or persist in smaller portions before the vesting period ends. For any unlock that is not large or massive, a similar pattern of modest, steady downward price pressure from sustained unlocks is observed. Hence, it's challenging to discern the quality of unlock scale.

Cliffs and the Linear Gulf

A clearer pattern in the data is the behavior of larger scale unlocks in the lead-up to events. In the 30 days prior to the event, a continuous price decline is often seen, accelerating in the final week. Post-unlock, prices tend to stabilize within approximately 14 days, returning to neutral levels.

This price behavior may be attributed to two primary phenomena:

· Sophisticated Hedging: Large unlocks are typically allocated to liquidity providers as hedging counterparts. By locking in prices ahead of the unlock or taking advantage of volatility, these parties reduce token selling pressure and mitigate the direct impact of the unlock. Many firms begin hedging based on scale a week or even a month before. If done correctly, this strategy can effectively minimize the unlock's market impact.

· Retail Anticipation: The sharp decline in the final week may result from retail investors preemptively driving down the price. They are aware of the impending unlock and sell tokens to avoid dilution, unaware that the unlock recipients may have already offloaded through their hedging.

This behavioral pattern is also evident in different categories of weighted trading volume, usually peaking at 28 or 14 days before unlocking.

Interestingly, the data shows that the performance of massive unlocks (> 10% of the supply) is as good as or even better than that of large unlocks (5%–10%). This may be because the scale of the unlock is too large to be completely hedged and cannot be sold or unlocked within 30 days. Therefore, their market impact is often more gradual and long-lasting.

The last chart focuses on the change in volatility. A large unlock causes significant volatility on the first day. However, this volatility essentially subsides within 14 days.

How to Trade?

In most cases, the key is to focus on supermassive and large unlocks on the calendar. These are usually the starting cliffs for transitioning to linear unlocks. For any given unlock, the proportion granted by Cliffs can vary greatly, ranging from 10% to 50%. What really matters is how much the unlock represents relative to the total supply.

The data shows that the optimal time to enter after a significant unlock is 14 days later, by which time volatility has stabilized and hedges may have been unwound. For exiting, the best time is 30 days before a significant unlock, when hedges or market pre-reactions often begin.

For smaller unlocks, it is usually best to wait for them to complete.

Key Predictive Factors for Receiver Type and Price Impact

When analyzing unlocks, the second and most important factor is the receiver type. Who is the recipient of the tokens, and what does this mean for price behavior? The recipients can vary widely but are generally divided into five main categories:

- Investor Unlock: Tokens allocated to early investors as compensation for funding the project

- Team Unlock: Tokens reserved to reward the core team, whether through a one-time payment or as part of ecosystem development

- Ecosystem Unlock: Injecting tokens into the ecosystem to fund activities such as liquidity, network security, or grants.

- Public/Community Unlock: Distributing tokens to the public through airdrops, user rewards, or staking incentives.

- Burn Unlock: Tokens used only for burning, reducing supply. These are rare and, therefore, not part of this analysis.

There is some disagreement about which receiver type has the greatest downstream price impact. Some believe that most community airdrops are carried out by Sybil attackers, flooding the market with selling pressure. Others believe that injecting hundreds of millions of tokens into the ecosystem will dilute value. Some also think that VCs and investors are the fastest sellers, looking to profit.

After analyzing thousands of unlock events, the data shows:

· Almost all categories exhibit a negative price impact, but with subtle differences

· Ecosystem development unlocks have the least disruptive impact, while team unlocks consistently result in the largest price drop

· Investor and public/community unlocks have a moderate impact on price

However, just like unlock scale, these numbers alone cannot explain the whole picture. When you chart price movements by recipient type in the 30 days before and after an unlock event, different behaviors emerge.

What drives recipient behavior?

At first glance, team unlocks seem most damaging, while ecosystem unlocks pose little threat. But these are only surface-level insights. Why are there differences? What drives recipient behavior? What lessons can protocols learn from this data?

Team Unlocks

Team unlocks are among the least price-friendly categories. You should proceed with caution when the team is nearing cliffs or in mid-distribution.

When plotted, the impact on token price follows a roughly linear downward trend starting 30 days before the unlock date and continuing with a steep angle. Team unlocks often possess two characteristics that make them more impactful on price compared to other recipient categories.

Uncoordinated selling by team members:

· Teams are typically composed of multiple participants with varying financial goals and no coordinated method to liquidate their tokens

· Many team members see their tokens as compensation for long-term (sometimes multi-year) efforts before receiving proper remuneration. When these tokens unlock, especially nearing cliffs, the incentive to profit-take is high, which is understandable

· Even with linear unlocks, these tokens are often part of their income and need to be sold

Lack of hedging or mitigation strategies:

· Unlike large investors or institutions, teams rarely employ sophisticated techniques to minimize market impact when selling

· Experienced entities typically engage market makers to strategically manage large token distributions

· Additionally, a pre-hedging strategy can reduce the immediate market pressure upon unlock over time.

So, this explains why the price is so negative, but why was a price drop also observed in the first 30 days? This is largely due to a severe price impact combined with overlapping linear unlocks. Why attempt to control the median price before observation, as many unlocks are continuous, the data still shows suppression. In this regard, if you do your best effort, not only do you need to skip bulk Cliffs unlocks, but you also need to delay purchases during the linear unlock period.

Ecosystem Development Unlock

In terms of ecosystem development, a unique trend is observed: a slight price decrease in the first 30 days before the unlock, followed by an immediate positive price impact post-unlock. Unlike other unlock types, ecosystem development unlocks typically steer tokens towards plans to create long-term value and strengthen the protocol.

Why does the price rebound (and often rise) post-unlock:

· Liquidity Provision: Tokens are often allocated to lending platforms or liquidity pools, thereby increasing market depth, reducing slippage, and enhancing overall token availability. By enhancing "market availability," these unlocks can not only stabilize trading conditions but also boost participant confidence.

· Participation Incentives: Ecosystem funds usually incentivize user participation through reward programs. These initiatives (such as liquidity mining or staking rewards) create a flywheel effect of participation, thereby fostering network activity. As participants recognize the potential for continued growth, they are less likely to sell immediately but choose to continue investing in the ecosystem.

· Grants and Infrastructure Funding: Developer grants and infrastructure project funds support dApp creation and network scalability. While the returns on these investments typically take 6-12 months to materialize, they demonstrate a long-term commitment to ecosystem growth, thereby alleviating short-term selling pressure.

How to explain the price drop before the unlock? There are two reasons for this behavior.

· Anticipated Sell-Off: As mentioned earlier, many investors pre-sell before the unlock, believing that increasing token supply will dilute value regardless of the unlock's purpose. This is particularly common among retail participants, whose misunderstanding of unlock types drives short-term decisions.

· Liquidity Preparation: Grant or allocation recipients often need to prepare liquidity in advance. For example, to establish a liquidity pool on a DEX, recipients may sell existing assets to ensure stablecoins or other paired assets. This preparatory sell-off can create downward price pressure even before token deployment.

Investor Unlocking

Investor unlocking is one of the most predictable events in the token market. Unlike other categories, these unlocks usually exhibit controlled price behavior, with data from 106 unlock events showing a consistent trend: a gradual, minimal price drop. This stability is not coincidental. Early investors (whether angel or Series C) typically have a VC background and possess expertise in managing positions.

These investors are not just transferring risk; they actively avoid potentially disrupting the market while optimizing returns. By understanding the sophisticated strategies they employ, traders can predict how these events will unfold and adjust their positions accordingly.

OTC Desks: Investors frequently engage liquidity providers or OTC trading desks to sell large quantities of tokens directly to interested buyers. This method completely bypasses the public order book, avoiding immediate selling pressure from the seller and signaling to the market.

T/VWAP and Hedging: Time Weighted Average Price (TWAP) execution or Volume Weighted Average Price (VWAP) strategies help spread token sales over time to reduce price impact. Many investors also use futures for advance hedging of their positions to "lock in" prices before the unlock event. They then gradually unwind these positions post-unlock to further mitigate volatility.

"Locking in" or "hedging" actually involves opening short positions using derivatives before the unlock date, aiding in ensuring a favorable price when unwinding the short position during token sales.

Since 2021, the use of advanced options strategies has expanded beyond investors, with more project teams adopting them to generate recurring revenue or manage funds more efficiently. For traders, this evolution reflects the increasing complexity of the crypto market, unlocking opportunities for prediction and alignment with key players' strategies. Options, whether sold privately or used as loan collateral, play a crucial role in shaping market dynamics, providing informed traders with a clearer view to interpret token activity.

Community and Public Unlocking

Community and public unlocking, such as airdrops and points-based reward programs, mirror investor unlocking behavior, with prices gradually declining around the event. This dynamic is shaped by two distinct behaviors among recipients:

· Immediate Sell-offs: Many retail participants liquidate rewards soon after receiving them, prioritizing liquidity.

· Long-Term Holder: Most public airdrops are designed for holding rather than selling, reflecting a cohort of participating users or less active traders.

While the overall price impact may be minimal, these results underscore the importance of a well-thought-out reward structure. Thoughtful design can prevent unnecessary market turmoil while achieving the intended goals of community development and participation.

Summary

Token unlocks are an essential mechanism in the crypto ecosystem to fund development, incentivize participation, and reward contributors. However, their vesting periods, scale, and recipient categories are key factors in determining their price impact. Understanding what these impacts are and why they occur can help inform better trading decisions and assist protocols in better structuring their unlocks.

This analysis of over 16,000 unlock events for 40 tokens highlights key trends:

· In terms of minimizing short-term price disruption, linear unlocks outperform the initial Cliffs unlocks, although larger Cliffs typically recover better after 30 days.

· The most significant price movements often stem not from token recipients but from retail reaction to narratives and broader sentiment.

Recipient Category Dynamics

· Ecosystem Unlocks: Sustainably positive outcomes driving growth through liquidity provision, user incentives, and infrastructure funding.

· Investor Unlocks: Least disruptive category due to nuanced strategies such as OTC sales, TWAP/VWAP execution, and options hedging.

· Team Unlocks: Most disruptive category, with poorly coordinated and immature sell-off strategies leading to significant price drops. Teams can mitigate impact by working with market makers.

· Community Unlocks: Limited long-term impact as many recipients hold onto tokens, but short-term "miners" tend to sell tokens for immediate gains.

Conclusion

Before engaging in long-term trading, be sure to check unlock schedules using tools like CryptoRank, Tokonomist, or CoinGecko. Unlock events are often misunderstood but play a crucial role in token performance.

Contrary to common belief, VC and investor unlocks are not the primary drivers of price declines. These participants typically align with the protocol's long-term goals, employing strategies that limit market turbulence and maximize returns. Instead, team unlocks require closer scrutiny as poorly managed allocations often put downward pressure on token prices. Ecosystem unlocks present a unique opportunity and, when aligned with clear growth objectives, often serve as a catalyst for adoption and liquidity, making them a favorable entry point into the market.

Original Article Link

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