Delphi Labs CEO: FDV is not a meme, and a high unlock does not mean the project is going to zero

Original Title: “Narrator: FDV was indeed not a meme”

Author: José Maria Macedo

Translation: Deep Tide TechFlow

FDV is indeed not a meme. Since this article was published, I have been talking to over-the-counter brokers to try to understand the secondary market structure for shorting assets. The findings have been enlightening, so I want to share them with everyone.

In short, I do not think these will be bullish unlocks.

Many of these assets have active sellers, but very few have bids that are 70% below market price (we are talking about standard SAFT, which has a 1-year cliff and a 2/3-year vesting period).

In terms of trading volume, I roughly estimate the total trading volume of SAFT to be around $100 million based on conversations with different brokers. Considering that these assets will have hundreds of billions of dollars in unrealized gains unlocked over the next few years, this is basically a done deal.

To put it simply, what “bullish unlocks” hope to see is as low an unrealized gain market cap ratio as possible, as explained in the linked article.

Most tokens are sitting on a large amount of unrealized gains from teams (0 cost basis) and early investors (you can calculate this yourself using tools like cryptorank.io).

Coupled with extremely low float rates (generally 5-15%), most projects are trading at 4-8 times their unrealized gain market cap, meaning the total circulating market cap of the project has 4-8 times the unrealized gains.

Assuming from the Cliff Day, over a period of 2 years, this means that assets worth the entire market cap will be unlocked every 3-6 months. This makes it difficult to attract buyers, especially when their alternative beta exposure is memecoins and other assets without supply overhang.

One way to mitigate this effect (besides increasing initial float) is high pre-issuance secondary trading volume, ideally as close to the current market price as possible.

This helps reset the cost basis of the unlocked tokens and fundamentally lowers the unrealized gain market cap ratio (for example, the now-famous Multicoin SOL assistance led to the first unlock).

Unfortunately, I have not seen this in the over-the-counter market.

In this regard, I am working to understand the market structure. I do not want to single out specific assets, but many assets have the following characteristics:

• Extremely high unrealized gain market cap ratios;
• No secondary demand even at ~70% below market price;
• Funding rates on Binance consistently positive, with open interest reaching eight figures;

Who would covet these things on CEX but is not interested in buying on the secondary market at a discount of over 70%?

My assumption is that there are special frictions on both the buy and sell sides.

I do not know much about the buyers, but I think that if they are spending money to go long on these things, they are likely uninformed retail gamblers who do not understand the vesting timeline or the immaturity of the OTC trading platform.

Sellers may include:

a) Founders/teams, who have more than 90% of their new coins locked in token bags, thus having no collateral or inclination to short;

b) Investors from venture capital funds who cannot or do not have the setup to short assets on CEX;

This is why the opportunity to short these assets and profit from it still exists.

By the way, contrary to what the doomsayers in CT tell you, this does not mean that all cryptocurrencies are scams, nor does it even mean that all assets with high unrealized gain market caps will go to zero.

I am very optimistic about cryptocurrencies and believe that there will be some categories of winners that will rise through their unlocks because they do have real applications.

However, there will also be long-tail assets that will experience “zeroing out.” This is quite natural and is a phenomenon you would expect in an asset class that provides liquidity for early-stage venture capital.

After all, most venture capital investments fail. In traditional venture capital, only a very small number of elite companies go public and have liquidity, while long-tail projects quietly fail.

In the cryptocurrency space, there is a higher proportion of venture capital projects that ultimately not only have spot liquidity but also have liquid derivatives markets. This is unheard of in traditional venture capital and is why crypto venture capital has become a unique asset class.

This also means that the long-tail failures of crypto venture capital will be public and painful, with both sides of the trade either making or losing significant amounts of money, rather than failing quietly.

This also means that structural shorting opportunities in cryptocurrencies will be more abundant than in any other asset class. To some extent, you can basically bet money on the undeniable fact that most startups will fail.