Therefore, token unlocks are potentially some of the most important hyping mechanisms in the cryptocurrency market that greatly affects token price movement and overall market dynamics. These events, something central to the design of many crypto projects, are known as token unlocks — events that release previously locked tokens into use. Here are the details on what to expect with unlocks, how they impact market volatility, and how you can profit during unlock events.

Every week there are $600 million+ worth of tokens unlocked, which present both risk and opportunity for investors. By better understanding the patterns and behaviors surrounding these unlocks, stakeholders can better equip themselves to make proactive decisions to avoid losing them.

The Double-Edged Sword of Token Unlocks

Token unlocks have become a key feature of the crypto market’s infrastructure. They are time-based events, decided in advance, when tokens that were otherwise locked up are made available to the circulating supply. These unlocks are instrumental to a project’s tokenomics. They’re what motivates early investors, hungry team members, and ecosystem developers to risk it all and help build. Typically, your vesting period will keep all of your tokens locked for several months to a year or more. It’s a period during which tokens may be released through a drip campaign or at set times.

When these tokens are released, they can create a sell pressure as the new supply overwhelms the existing market demand. On average, about 90% of token unlock events lead to price declines, creating crucial moments for traders and investors. And when a large number of tokens are unlocked all at once, the impact is greatly magnified. This dramatic increase in supply can quickly outpace demand.

"Buy the rumor, sell the news (or unlock)"

This popular meme summarizes the typical strategy used by nimble traders who can feel the detrimental effects of token unlocks coming.

Decoding Unlock Dynamics

It turns out the type of unlock event plays a very large role in dictating its impact on price. Typically, the unlocks that are all the more responsible for the most acute price crashes are team and early investor unlocks. These stakeholders typically purchase tokens at steep discounts prior to the public token generation event (TGE). Today, they are desperate to collect $44 billion in profits. This sort of activity can produce formidable downward price pressure. It’s most acute if the market lacks the demand to soak up all the new tokens entering circulation.

Ecosystem-building unlocks often raise the price. These unlocks are intended to pay for the continued development and expansion of the project’s ecosystem. Saving the project requires injecting more capital to set off some growth and attraction of new users. This influx would certainly drive up demand for the token. On average, unlocking with an ecosystem-building policy produces a low 1.2% price premium.

It’s worth emphasizing that the wider positive impact of ecosystem-building unlocks is no sure thing. The true test of these unlocks will be the project’s capacity to deploy the funds efficiently and yield real, measurable outcomes. If the market perceives the unlock as a sign of internal funding issues or mismanagement, it can still lead to negative price action.

Indeed, the carnage has been ugly for other recent hype projects Pyth (PYTH), Arbitrum (ARB), and Aptos (APT). This has primarily occurred at their big unlock events. These examples underscore the need for investors to remain aware of forthcoming unlocks. From that perspective, they need to determine what these happenings mean for their market environment.

Strategic Maneuvering and Mitigation

Sophisticated investors, including many venture capitalists (VCs), use extensive strategies to protect against risks created by token unlocks. At least six months before an unlock, VCs can hedge with derivative contracts to secure an attractive selling price. This gives them the ability to reap profits even if the market price when their token unlock occurs is significantly lower than the average they received. As an example, a typical stock vesting schedule with a cliff at years would look like Token Unlock.

This practice underscores the information asymmetry that is rife throughout today’s crypto marketplace. VCs who bought tokens at extremely low prices pre-TGE can often realize substantial profits, while retail investors buying post-TGE bear the brunt of the selling pressure after token unlocks. This new reality highlights the need to practice due diligence and make informed decisions across the board by all participants in the market.

Retail investors may be better equipped with tools and resources available to track upcoming token unlocks. Token Unlocks provides transparency into unlock schedules and how many tokens are being unlocked. It sheds light on all the other people who are getting these tokens. By understanding developments in the clean technology space, if investors are aware, they can see price directions ahead of time and react appropriately.

Additionally, a brief reading of the vesting schedule can help paint a picture of the future long-term distribution of tokens. With linear vesting, tokens are released gradually over time. This methodology serves to lessen the effect of unlocks by staggering the market impact of selling pressure. In contrast, cliff unlocks are a sudden burst of token supply. Even a small, sudden influx can lead to large and abrupt declines in price.

Perhaps one of the most prevalent and exploitable phenomenon seen around token unlocks is the “pump-and-dump” scheme. In this other scenario, the person or group simply manipulates the market by artificially inflating the price right before the unlock. Next, they instantly liquidate their new positions as soon as the fresh tokens are released. This deceptive practice exploits unsophisticated investors and leads to billions in unnecessary losses.