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Understanding how all elements of crypto markets work is key to success in this volatile industry. In this guide, we explain what you need to know about token unlocks and how to use this information to invest properly. Let’s get started.
- What are token unlocks?
- How do token unlocks work?
- How do token unlocks affect crypto prices?
- Token unlock schedules can help you time investments
- Frequently asked questions
What are token unlocks?
Token unlocks are events in crypto where locked coins or tokens are released and become available for trading in the open market. These tokens are typically held by initial investors, team members, or partners of a crypto project and are released according to a predetermined schedule or set of conditions.
When you are ready to invest in a cryptocurrency, you likely will already take into account its market capitalization, token supply, price, etc. However, not many people consider how venture capital might affect their investment. Token unlocks are a crucial part of the investment cycle, and knowing how they work can help you level up your trading game.
How do token unlocks work?
When properly implemented, a token unlock can manage liquidity, investor relations, regulatory compliance, and a project’s long-term sustainability.
Token distribution
Knowing a token’s distribution will help you understand the investment cycle, the different participants involved in the fundraising process, and why founders lock tokens.
1. Team allocations
Founders and the core team usually receive a portion of the total crypto supply. These tokens are subject to vesting schedules and unlocks over time.
For example, a founder may receive 10% of the total supply but with a four-year vesting schedule and a one-year cliff. This means that no tokens are available in the first year (cliff period). After one year, 25% unlocks, and the rest unlocks monthly or quarterly over three more years.
2. Investors and private sales
When a project raises funds through token sales, early investors will often get tokens at a discount. These investors typically must agree to gradual unlocking schedules to prevent mass sell-offs that could affect the token price. There are many types of investors involved in the fundraising process:
| Investors | Description | Vesting period |
|---|---|---|
| Seed | These are the earliest backers that provide capital to help the project develop an initial concept or minimum viable product (MVP). | 2-4 years |
| Strategic (VC/angel) | These investors bring more than just capital — they provide strategic value (e.g., networking, advisory, marketing, or partnerships). | 1-3 years |
| Private sale | These investors participate in token sales, which occur before a project is fully launched but are often subject to vesting periods. | 6 months-1 year |
3. Treasury and ecosystem funds
Founders may manage a treasury fund. This fund includes tokens allocated for ecosystem growth, partnerships, grants, and research and development. Unlocking these tokens over time ensures ongoing project funding instead of capital being burned through too quickly.
Regulations
Perhaps the most important aspect of token unlocks is that they allow projects to comply with regulations (e.g., securities laws). Token unlock schedules help avoid a security token classification.
By ensuring tokens are used for utility (staking, governance, transactions), tokens are distributed gradually to prevent speculative trading concerns and are not concentrated in the hands of a few individuals. To accomplish this, founders will often:
- Set up a foundation or decentralized autonomous organization (DAO) to manage token unlocks instead of direct founder control.
- Structure token unlocks so that no single entity can manipulate the market.
- Work with legal advisors to structure compliant token sales.
Token unlock execution
Founders plan token unlock schedules in advance and usually communicate them to the community. Many projects publish a token unlock calendar to keep you in the loop as well. Some projects use smart contracts to automate unlocks.
These events can occur monthly or quarterly, or at virtually any interval that a founder or teams deems necessary. They can also happen all at once, but this is generally not a common practice.
You can look for token schedules in a project’s documents. However, public dashboards (e.g., Tokenomist) may also show real-time unlock schedules. When founders are transparent with the schedule it prevents panic around unlocking events.
There is generally no fixed rule or legal standard for releasing a certain number of tokens at a time, but there are a few methods.
How do token unlocks affect crypto prices?
While some believe that token unlocks inevitably exert downward pressure on price, others believe that they are already priced in and price changes stem from demand and utility.
Negative price impacts
In many cases, token unlocks do lead to sell-offs, especially when a significant portion of the supply enters the market. For example, Apecoin had a linear team unlock of 0.7% per month (about $11 million worth of APE at the time) starting in March 2023. The ApeCoin team held a substantial portion of the total token supply (47%).
With a market cap of $1.6 billion, APE’s price dropped by 77% over the next six months. On-chain data showed the team depositing tokens into Market Maker OTC accounts, most likely to sell their holdings.
This consistent influx of tokens has made it challenging for the token’s price to recover. If you were aware of APE’s token unlock schedule in advance, you probably would have avoided buying it at launch or around the first unlocks.
Positive or neutral effects
It is certainly true that token unlocks can negatively affect price. However, they can also have neutral effects or not impede positive ones. Optimism’s June 2022 unlock, while initially causing some selling pressure, demonstrated how a well-designed ecosystem unlock can drive growth.
The unlock allocated about 3% of Optimism’s market cap to the Governance Fund. Over the next 60 days, 36 million OP tokens were distributed to 24 different projects, focusing on market-making and participation incentives.
In other words, the Governance Fund allocated OP to various projects, many of which were DeFi protocols to stimulate adoption and usage. DeFi protocols received tokens to distribute as incentives (e.g., yield farming rewards, governance incentives, etc.).
Why are token unlocks important?
Token unlocks are important because they maintain the balance of incentives between the various investors, consumers, regulations, and the project itself. The various components often do not have the same goals.
Project developers gradually release coins or tokens over time to ensure that a project survives long into the future. Token unlocks involve multiple stakeholders, like investors and team members, making their execution important for maintaining trust and reputation.
At the same time, early investors must have a way to reap the rewards of bootstrapping a project early on, as success is often not guaranteed. All in all, token unlocks create an interdependent relationship where stakeholders don’t have mutually assured success, but they do have mutually assured destruction.
Therefore, companies design token unlock strategies to:
- Reduce legal risks (securities laws, fair trading regulations).
- Prevent crashes from mass unlocks.
- Align incentives between the team, investors, and users.
Regulatory compliance
So far, we have covered how token unlocks affect prices and investors. But there’s another critical factor — regulatory compliance. Poorly structured unlocks (or no unlocks at all) can attract legal scrutiny, especially if they resemble market manipulation or unregistered securities.
Securities laws
In many countries, early investors can’t immediately sell their tokens. For example, in the U.S., SEC Rule 144 requires investors to hold tokens for at least 12 months before selling. These restrictions exist to prevent early investors from dumping tokens on retail buyers.
If investors get tokens without restrictions and dump them immediately, regulators could classify the project as an unregistered security. This happened in high-profile SEC cases against Ripple (XRP) and Telegram’s TON token.
Token unlock schedules can help you time investments
Before investing in a token, you may consider its market cap, total supply, or fully diluted valuation (FDV). Now, you can add token unlocks to that list of variables to factor in. Make sure you understand whether there is a token unlock schedule, then use this information to work out whether it is the best time to invest.
However, we advise you don’t count on an unlock making a huge difference to a coin or token’s price. While most unlocks in crypto do lead to negative price pressure, the impact is negligible with well-thought-out unlocks and products with actual utility. They can also help project’s avoid any regulatory scrutiny.