Over the past few weeks, AXS, the native token of the gaming platform Axie Infinity, surged more than 100% ahead of its "token unlock," which saw 1.8% of the token's total supply flood the market. SAND is also rallying ahead of a 12% supply unlock in three weeks time. Unlocks are typically bearish catalysts for a token's price, so what happened? Today, we explore investor behavior around three major unlocks.

Token Unlocks: Not All Built The Same

January 26, 2023

By Conor Ryder, CFA

Token unlocks are considered bearish events that allow early investors, developers and employees the opportunity to sell their vested tokens. Early token holders are incentivized to sell due to their cost basis being so low, often looking at triple digit returns once they get the opportunity to cash out.

During an unlock, a token will experience heavy sell pressure as markets are flooded with supply, thus it is paramount that investors have a deep understanding of the quantity and schedule for unlocks, especially during a bear market when liquidity is scarce. Generally, investment funds are the biggest sellers as their primary goal is profitability, whereas users of the project and employees are more likely to hold. However, not all token unlocks are cut from the same cloth, and investors are starting to realise that.

Today, we will explore market behavior before, during and after a big token unlock to understand how investors react to an influx of supply.

Tokens Rallying Into Unlocks in 2023

The year has started on a bullish note for crypto as a whole, but perhaps most interesting has been the gains made by tokens facing imminent unlocks, bucking the trend of bearishness we saw in 2022 surrounding token unlocks. Three tokens in particular with hefty upcoming unlocks on the way—AXS, DYDX and SAND—have outperformed the broader market significantly. We’ll take a look at DYDX later in this article, which hit headlines yesterday for delaying their upcoming unlock. 

AXS and SAND are up 50% and 46% respectively versus ETH year to date. We use ETH rather than USD to understand each token’s relative market performance amid a general bull rally. AXS in particular spiked 40% in the hours before its unlock on the 23rd.

This outperformance goes against the trend in 2022, which saw tokens facing unlocks underperform the market. What’s even more interesting is that the two tokens charted above, AXS and SAND, were victims of this trend during their 2022 unlocks.

So what is different in 2023 that warrants such a shift in trend, resulting in these tokens outperforming the market ahead of unlocks? Can we expect this trend to continue for upcoming unlocks? I believe we can muster up a reasonable guess as to what might happen, but first we must examine factors like token allocation, investor behavior after unlocks and market dynamics in spot markets.

Token Allocation

AXS, SAND and DYDX are all facing upcoming unlocks, but a key differentiator in these unlocks is to whom the tokens are being distributed. We can then see how the different allocations go on to affect sell pressure on the token once liquidity frees up during unlocks. 

AXS

AXS, the governance token for Axie Infinity, has a token allocation that differs from other projects we’ll look at. Once all tokens are unlocked, it will have an allocation of 20% of total supply to play-to-earn users, 29% to stakers and a relatively small amount of tokens to early investors.

Because the AXS token is needed to vote on the game’s developments, it would be safe to assume the portion of the allocation given as staking rewards or to users would be less likely to be sold than early investors. The best way to see this play out in the data is to examine AXS’ two most recent unlocks, in October last year and in January of this year. Due to the uneven nature of AXS unlock schedule, October and January’s unlock saw a very different reaction.

The October 26th AXS unlock released 8% of the capped supply, a significant portion, which saw about a quarter of that amount go to early investors. To understand investor behavior, we chart each tick-level transaction > $20k for the AXS-USDT pair on Binance, which is the highest volume AXS market.

On the day of the unlock, we observed significant selling pressure for among these larger "whale traders," which led to AXS underperformance at the time. Buy orders picked up after the initial wave of unlocks though, meaning AXS didn’t have as much sell pressure as other projects, which we’ll see shortly.

The good news for holders of AXS was that in the latest unlock on Jan 23rd, we observed more large buyers than sellers for the token, which is unusual for unlocks. This was largely due to the fact that while the unlock represented 2% of the total supply, this unlock was only distributed to stakers - with none going to investors. This lack of sell pressure this time around demonstrated that where the unlocked tokens are distributed has a lot of significance for price action. Distributing only to stakers allowed AXS to outperform the market to start the year.

SAND

SAND functions as the unit of exchange in the Sandbox metaverse, as well as acting as a governance token for the Sandbox DAO. Unfortunately for holders of SAND, the token is at the behest of a significant upcoming unlock schedule, with over 44% of the supply yet to be unlocked. 12% of the supply is to be unlocked on the 14th of Feb this year, as it was back in August of last year. Last year’s unlock of SAND should be a good gauge of investor behavior this time around, as the allocation percentage of the distribution remains the same. Roughly 50% of the unlock is allocated to investors and advisors. 

In August, we saw these investors sell en masse as soon as they had the chance, creating huge sell pressure for SAND, which underperformed ETH by 20% that month. Again, we look at the SAND-USDT pair on Binance, which is the highest volume market.

As we can see, the day after the unlock, August 14th, nearly 75% of all significant trades were sell orders as investors looked to cash out of SAND. That sell pressure continued in the days after the unlock as sell orders dominated buys. The allocation of SAND unlocks is skewed towards investors and the token performance has suffered during unlocks as a result. As the token allocation is the same for the Feb 14th unlock, one would expect similar underperformance as sell pressure picks up. 

This same unlock schedule is due every 6 months until 2025, with the same allocation to investors, so holders of SAND look to be facing serious headwinds until then.

IMX

The roughly 50% split of an unlock towards investors seems to be a one way ticket to sell pressure for a lot of tokens analyzed as part of our analysis. IMX is the native token of the NFT scaling solution on Ethereum, Immutable X. IMX faced its own significant unlock in November of last year, which saw nearly half of the unlock go towards early private investors. As was the case with SAND, this led to heavy sell pressure for IMX.

DYDX

DYDX is the native token of the perpetual futures decentralized exchange of the same name. The token was due to release 15% of its total supply on Feb 3rd, a move that would have doubled the current circulating supply. According to TokenUnlocks, a massive 77% of the supply of dydx tokens remain locked. Half of the unlock on Feb 3rd was due for investors, which as we have seen with SAND and AXS, is a ratio that’s a recipe for sell pressure. 

However, it was revealed yesterday that dydx will be postponing the investor portion of this unlock in an effort to relieve sell pressure on the token, moving the investor unlock date until December. DYDX rallied 20% on the news that this negative overhang on the short term price was being postponed to the end of the year. Futures investors flocked to participate in the bullish token news as open interest increased 50% in a matter of hours.

Postponing the investor unlock tells me that the team were very aware of the potential impact allocating such a large amount to investors would have on the token price. I imagine their plan is to align the unlock with the release of v4, the more decentralized version of the exchange that will be hosted on the Cosmos ecosystem. V4 has been delayed already and is not expected anytime soon, so the plan is probably to drown out the bearish unlocks next year with news of the release of v4, if I had to guess.

Market depth for DYDX on centralized exchanges is the lowest out of AXS and SAND, meaning it would take less orders to move the price than the aforementioned tokens.

What's Next for DYDX, SAND and AXS?

The tick trade data suggests that the higher the allocation towards investors, the more sell pressure a token will endure during unlock periods. An allocation of 50% to investors seems to be enough to ensure mass sell pressure, with IMX and SAND suffering from 75% sell orders on unlock day. AXS unlock last year was roughly 25% to investors, which still saw selling pressure on the day of unlocks but was much more balanced in the days after. Going off these examples, it seems anything greater than a 25% distribution to investors should set alarm bells off for token holders.

Now that the DYDX investor unlock is delayed, and considering we have seen that non-investor allocations are less likely to cash out of their vested tokens, I would expect short term headwinds for DYDX to be alleviated briefly until the December unlocks at least.

SAND on the other hand faces a significant unlock in February that should mirror the investor reaction to its last unlock in August. I would expect heavy sell pressure due to the high allocation of 50% towards investors.

AXS looks to have its worst unlocks in the rear view mirror. As the remaining unlock schedule is more geared towards users and stakers, I would expect to see less sell pressure for AXS during unlock periods. Out of the tokens analyzed, AXS looks to have the clearest path forward for a smooth unlock period.

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