A deep dive into Token unlocking: what is the most important factor in price changes?

Author: Keyrock

Compiled by Felix, PANews

Key Points:

• More than $600 million worth of Tokens are unlocked every week
• Regardless of scale or type, 90% of unlocks will generate negative price pressure
• The impact of Token price usually starts 30 days before the unlocking event occurs
• Larger-scale unlocks will lead to a significant price drop (2.4 times) and increased volatility
• Team unlocking will trigger the most severe collapse (-25%) and irrational dumping
• Investors unlocking have shown a controllable price performance as they adopt wiser strategies to reduce the impact on the market.
• Ecological development unlocking is one of the few factors with a positive impact (average +1.18%)

Introduction

Unlocking of tokens worth over $600 million per week (equivalent to Curve's market value). These tokens are typically released at predetermined intervals and flow into the hands of different participants. The scale and intervals of these unlocks, the expected and actual dates, and the recipients of these tokens all have an impact on the tokens' value and the market.

In the field of encryption, which is dominated by short-term decision-making and rampant profit-seeking behaviors, the rhythm and structure of Token unlocking are crucial to ensure long-term value acquisition and improve holder satisfaction. Unlocking is not a novel concept. In the TradFi field, mechanisms such as equity vesting have been used to incentivize employees to maintain consistency in the long term. However, in Block projects, the methods, frequencies, and impacts of Token unlocking vary greatly.

In the analysis of 16,000 unlocking events in this article, a stunning pattern emerged: unlockings of all types, sizes, and recipients almost always have a negative impact on prices.

This article adopts a trader-centered approach to study some of the most prominent Token unlocks in the past few years. It analyzes how unlocks of different scales and recipient types affect prices, and determines the recurring patterns and key behavioral differences in the entire ecosystem.

Understanding Unlock

As a trader, you cannot predict the decisions of the overall retail investor to buy or sell, but you can access information on another group of holders, those listed on the vesting schedule. The unlocking schedule is key to unraveling the mystery, not only hinting at future supply shocks but also serving as a leading indicator of sentiment and Fluctuation.

Most vesting tables look like the table above: a long-term calendar with 'Cliffs' and 'Linear or Batch Unlock Blocks' marked in the middle. These Blocks are designated to different recipients - categories such as 'Seed Investors', 'Core Contributors', or 'Community'.

Designing a token unlocking mechanism is a challenging task for any project. You can't simply preallocate all tokens because recipients may leave and sell them. But you also can't make them wait too long, or they may think the project is not worth it. The project needs to strike a balance: incentivizing recipients to stay during the initial development phase while also keeping them engaged for the long term. The common solution is to gradually allocate tokens over a specified vesting period.

A typical vesting may look like: the vesting period starts from the relationship between the recipient and the organization and continues until all allocations are made. For most encryption projects, these are outlined in the White Paper in the early stages. There may be no allocation in the first ⅓ ± ¼ of the vesting period. Then, a large amount of tokens are released at once, followed by linear unlocking for the remaining time.

This method is effective because it can ensure that the recipient makes a minimum commitment before receiving the reward. For example, developers are incentivized to continue participating, while investors face an initial lock-up period followed by partial cash-out. Slow unlocking can alleviate market pressure.

Not all unlocks follow this structure. Some are called "batch unlocks," releasing all Tokens at the end of Cliffs. Others are purely linear, allocating Tokens regularly from the beginning of Cliffs until fully allocated.

Key Elements of Unlocking Scale and Price Dynamics

This article first decomposes the vesting period of 16,000 compound events and categorizes each event by size. For each event, the daily Token price before and after the unlock for 30 days was tracked. In addition, the 'median' price and Volatility indicator of each Token one month before the 30-day pre-unlocking period were tracked. This is critical because many projects adopt a monthly unlocking plan. This method is not perfect, but it can better isolate smaller unlocks.

Finally, no asset can exist independently of the market. This is especially true for altcoins, which typically exhibit extreme beta correlation with their protocol tokens. To illustrate this point, this article standardizes the price changes in each unlocked data series.

To simplify, this article chooses ETH as the Benchmark, and then weights the prices in the sample (before, during, and after unlocking events) with ETH to obtain a more market-independent indicator.

Unlocking scale doesn't mean everything

After decomposing, classifying, and quantifying unlock events, plot the average price impact at different time intervals after the unlock date. When visualized, the data may appear chaotic. You may expect a proportional relationship between unlock size and price impact, but the correlation weakens after 7 days.

When scaled by relative magnitude, most unlocks appear to have similar degrees of price suppression. Instead, frequency is a more telling factor. As mentioned earlier, unlocks typically occur in the form of a single large batch after the initial Cliff, or persistently before the end of the vesting period. For any unlocks other than large or massive ones, similarly, smaller and stable unlockings have been observed to exert downward price pressure. Therefore, it is difficult to distinguish the quality of unlock scale.

Cliffs and the Gap Between Linear

What is clearer in the data is the behavioral characteristics of large-scale unlocking before the event occurs. In the 30 days before the event, a continuous price decline is usually observed, with an accelerated decline in the last week. After unlocking, prices tend to stabilize and return to a neutral level within about 14 days.

This price behavior may be attributed to two main phenomena:

• Complex Hedging: Large unlocks are typically allocated to market maker hedging recipients. These parties mitigate token pressure and alleviate the immediate impact of unlocks by locking in prices or leveraging volatility ahead of the unlock. Most companies start hedging one to two weeks or even a month in advance based on scale. When executed properly, this strategy can effectively minimize the impact of unlocks on the market.
• retail investor anticipated: The sharp decline in the last week may be due to retail investor's anticipation of the unlocking, so they sold Tokens to avoid dilution, while they may not be aware that the recipients of the unlocking may have already completed dumping through Hedging.

This pattern of behavior is also evident in different categories of weighted volume and usually peaks at 28 or 14 days before unlocking.

Interestingly, the data shows that the performance of massive unlocks (> 10% of the supply) is as good or even better than that of large unlocks (5%–10%). This may be because they are too large to be hedged completely and cannot be dumped or released within 30 days. Therefore, their market effects tend to be more gradual and persistent.

The last chart focuses on the changes of Fluctuation. Large unlocks cause significant Fluctuation on the first day. However, this Fluctuation basically subsides within 14 days.

How to trade?

In most cases, the key is to follow the large and super large unlocks on the calendar. These are usually the starting cliffs for transitioning to linear unlocks. For any given unlock, the ratio granted by cliffs may vary greatly, ranging from 10% to 50%. What really matters is how much the unlocks account for relative to the total supply.

The data shows that the best time to enter after a major unlock is 14 days later, when the volatility has stabilized and Hedging may have been lifted. For exiting, the best time is 30 days before a major unlock, when Hedging or market pre-reaction often begins.

For smaller unlocks, it's usually best to wait until they're complete.

Recipient type, a key predictive factor of price impact

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

• Investor Unlock: The Token allocated to early investors as compensation for funding the project
• Team unlock: Token reserved for rewarding the core team, whether through one-time payment or as salary
• Ecosystem Development Unlock: Inject 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 stake incentives.
• Destruction Unlock: Tokens used only for destruction to reduce supply. These are rare and therefore not included in this analysis.

There are different opinions on which type of recipient has the greatest price impact downstream. Some believe that most of the community airdrops are conducted by Sybil attackers, resulting in a market filled with dumping pressure. Others believe that injecting millions of tokens into the ecosystem will dilute the value. There are also those who believe that VC and investors are the ones who dump the fastest and profit from it.

After analyzing thousands of unlocking events, the data shows:

• Almost all categories show a negative price impact, but there are subtle differences
• The minimum destructive development unlocked by the ecosystem, while the team unlocking always leads to the largest decline in price
• Investors and the public/community unlock have a moderate impact on the price.

However, just like the unlocking scale, these numbers themselves cannot explain the whole situation. When you plot PA by recipient type within 30 days before and after the unlocking event, different behaviors will occur.

What is the behavior of the drive receiver?

At first glance, team unlocking is the most destructive, while ecosystem unlocking poses almost no threat. But these are just superficial insights. Why is there a difference? What drives the behavior of the recipients? What lessons can protocol learn from these data?

Team Unlock

Team unlocking is one of the least favorable categories for price stability. When the team is about to reach cliffs or is in the middle of allocation, you should be cautious.

When drawing charts, the impact on Token prices follows a roughly linear downward trend, starting from 30 days before the unlocking date and continuing to decline at a steep angle. Team unlocks often have two characteristics that can have a greater impact on prices than other recipient categories.

Incoherent dumping by team members:

• Teams are typically composed of multiple participants with different financial goals, and there is no coordinated way to settle their tokens.
• Many team members view their Token as compensation for long-term (sometimes years) work before receiving proper rewards. When these Tokens unlock, especially near Cliffs, the incentive to profit is high, which is understandable.
• Even with linear unlocking, these tokens are often a part of their income and need to be sold.

Lack of Hedging or mitigation strategies:

• Unlike large investors or institutions, the team rarely uses complex techniques to reduce market impact when selling.
• Experienced entities often recruit market makers to strategically manage large Token allocations.
• In addition, pre-hedging strategies can reduce the direct pressure on the market when unlocked over time.

So these explain 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 try to control the median price before observation, because many unlocks are continuous, and the data still shows suppression. In this regard, if you try your best, not only skip batch Cliffs unlocks, but also postpone purchases during the linear unlock period.

Ecosystem Development Unlocked

In terms of ecosystem development, a unique trend has been observed: there is a slight decrease in price in the first 30 days before unlocking, and a positive price impact immediately after unlocking. Unlike other unlocking types, ecosystem development unlocking typically guides Token into plans to create long-term value and strengthen the protocol.

Why does the price rise after unlocking (and often pump)?

• Liquidity Supply: Tokens are often allocated to lending platforms or liquidity pools to increase market depth, reduce slippage, and improve overall token availability. By enhancing market availability, these unlocks can not only stabilize trading conditions but also boost participants' confidence.
• Incentives for participation: Ecosystem funds typically encourage user participation through incentive programs. These measures (such as Liquidity Mining or stake rewards) generate a flywheel effect of participation, thereby promoting network activity. As participants recognize the potential for sustained rise, they are less likely to sell immediately and instead choose to continue investing in the ecosystem.
• Grants and infrastructure funding: Developer grants and infrastructure project funds support the creation of dApps and network scalability. Although the returns on these investments typically take 6-12 months to materialize, they demonstrate a long-term commitment to the ecosystem rise, thus alleviating short-term selling pressure.

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

• Expected dumping: As mentioned earlier, many investors dump in advance before unlocking, believing that increasing Token supply will dilute value, regardless of the purpose of unlocking. This is particularly common among retail investor participants, whose misunderstanding of unlocking types will drive short-term decisions.
• Liquidity Preparation: A large number of recipients for grants or distributions usually require advance preparation of Liquidity. For example, in order to establish a Liquidity pool on a DEX, recipients may sell existing assets to ensure stablecoins or other paired assets. This preparatory dumping can even exert downward pressure on prices before Token deployment.

Investor Unlock

Investor unlocking is one of the most predictable events in the Token market. Unlike other categories, these unlockings usually exhibit controlled price performance, and data from 106 unlocking events show a consistent trend: slow, minimal price drops. This stability is not accidental. Early investors (whether angel or Series C) typically have a VC background and expertise in managing positions.

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

OTC Trading Backend: Investors often hire Liquidity providers or OTC Trading desks to sell large amounts of Tokens directly to interested buyers. This method completely bypasses the public order book, avoiding immediate pressure from sellers and signaling to the market.

T/VWAP and Hedging: Time-Weighted Average Price (TWAP) execution or Trading Volume-Weighted Average Price (VWAP) strategies help to spread Token sales over time, thereby reducing price impact. Many investors also use futures to hedge their positions ahead of unlock events to 'lock in' prices. They then gradually unwind these positions after the unlock to further reduce volatility.

"Locking" or "Hedging" is actually opening short positions using Derivatives before the unlocking date, which helps to ensure the price is guaranteed as early as possible when unlocking the short positions upon Token sale.

Since 2021, the use of advanced Options strategies has expanded beyond investors, and more and more project teams are adopting them to generate regular income or manage funds more effectively. For traders, this evolution reflects the increasing complexity of the crypto market, unleashing opportunities to forecast and align strategies with major participants. Options, whether sold privately or used as loan Collateral, play a key role in shaping market dynamics, providing informed traders with a clearer perspective to interpret Token activities.

Community and Public Unlock

Community and public unlocks, such as Airdrop and point-based reward programs, reflect the unlocking of investors in terms of behavior, with prices gradually decreasing before and after the event. This dynamic is shaped by two different behaviors among recipients:

• Immediate dumping: Many retail investor participants liquidate their rewards after receiving them, prioritizing Liquidity.
• Long-term holder: Most public Airdrops are for holding rather than selling, which reflects a group of participating users or less active traders.

Although the overall price impact is not significant, these results highlight the importance of well-designed incentive programs. Thoughtful design can prevent unnecessary market chaos while achieving the expected goals of community development and participation.

Summary

Token unlocking is an essential mechanism in the encryption ecosystem for funding development, incentivizing participation, and rewarding contributors. However, the intervals, scales, and recipient categories of these unlockings are key factors in determining their price impact. Understanding what these impacts are and why they occur can help facilitate better trading and assist protocols in constructing their unlockings more effectively.

This article emphasizes key trends in the analysis of over 16,000 unlocking events for 40 Tokens.

• In terms of reducing price disruption in the short term, linear unlocking is better than the original Cliffs unlocking, although larger Cliffs usually recover better after 30 days.
• The most significant price fluctuations often come not from token recipients, but from the reactions of retail investors to the narrative and broader sentiment.

Receiver category dynamic

• Ecosystem unlock: Continuous positive results, driven by Liquidity provision, user incentives, and infrastructure financing to promote rise.
• Investor unlock: Minimum disruption due to OTC sales, TWAP/VWAP execution, and Options hedging strategies.
• Team unlock: The most destructive category, poor coordination and immature dumping methods have led to a significant price drop. The team can mitigate the impact by cooperating with market makers.
• Community unlocking: Limited long-term impact, as many recipients hold Tokens, but short-term Miners often sell Tokens for immediate gains.

Conclusion

Before engaging in long-term trading, be sure to check the unlocking calendar using tools like CryptoRank, Tokonomist, or CoinGecko. Unlock events are often misunderstood, but they play a crucial role in the performance of tokens.

Contrary to popular belief, VC and investor unlocks are not the main factors causing price drops. These participants typically align with the long-term goals of the protocol, adopting a strategy to limit market chaos and maximize returns. On the other hand, team unlocks require closer follow-up, as poorly managed allocations often lead to downward pressure on Token prices. Ecosystem unlocks provide a unique opportunity and usually serve as a catalyst for adoption and Liquidity when aligned with clear rise objectives, making it a favorable time to enter the market.

Related reading: How to solve the problem of unlocking and selling pressure of Token? Hack VC proposes two potential solutions