How VCs trade token unlocks (and what you can learn from them)

Key takeaways

• Token unlocks release previously locked tokens into circulation, often leading to increased volatility and price drops.

• Vesting schedules (cliff + linear release) aim to align early stakeholders’ incentives with long-term project success.

• VCs use advanced strategies such as OTC deals, staggered sales and derivatives to exit profitably and avoid crashing the market.

• Market timing, sentiment and token allocation size influence when and how VCs sell their unlocked tokens.

Token unlocks are pivotal moments in the crypto market, often causing significant price volatility. 

For retail investors, they can feel like a high-stakes gamble. But for venture capitalists (VCs) and other institutional players who receive large allocations of project tokens, these events are carefully calculated strategic opportunities. 

Understanding how these crypto whales work with token unlocks can provide invaluable lessons for everyday traders.

Token unlocks and their mechanics (tokenomics, explained)

At its core, a token unlock is the release of previously restricted tokens into the circulating supply. These tokens are typically part of a project’s vesting schedule, a pre-determined plan that gradually releases tokens to early investors, team members and advisers over a set period.

Vesting schedules usually include:

• Cliff period: An initial lock-up phase where no tokens are released. This can last from a few months to over a year, ensuring long-term commitment from recipients.

• Linear vesting: After the cliff, tokens are released incrementally, often daily, weekly or monthly, over the remaining vesting period.

The primary purpose of vesting is to align the interests of early stakeholders with the long-term success of the project, prevent immediate dumping of tokens and manage market supply. 

However, despite these intentions, unlock events often lead to increased selling pressure, as a sudden surge in circulating supply can outpace demand, causing price drops.

You may have seen this play out repeatedly. Projects like Pyth (PYTH), Arbitrum (ARB) and Aptos (APT) have experienced notable price depreciation around their major unlock events. 

Even newer tokens like Ethena (ENA) have shown similar patterns. Often, savvy traders anticipate these events, leading to pre-unlock sell-offs as the market braces for increased supply.

Did you know? Over $600 million worth of tokens unlock every week, and about 90% of those events lead to price drops.

How VCs trade crypto 

VCs operate with a different set of tools and objectives than retail investors. Their goal is to generate significant returns on their early-stage investments, and token unlocks are critical junctures for realizing those gains. 

They employ sophisticated strategies to maximize their profits while minimizing market disruption:

1. Over-the-counter (OTC) deals

One of the most common and effective methods for VCs to offload large token sums is through OTC desks. Instead of selling on public exchanges, which could cause massive slippage and crash prices, VCs transact directly with buyers. These buyers are typically other institutions, high-net-worth individuals or even market makers.

• How it works: A VC approaches an OTC desk with a large block of tokens to sell. The desk sources a buyer (or multiple buyers) and facilitates a private transaction at a negotiated price, often slightly below the current market rate.

• Benefits for VCs: It avoids slippage, maintains anonymity, prevents market panic, and allows for customized deal structures.

2. Staggered sales and gradual distribution

While not always perfectly timed, VCs often aim for a staggered approach rather than a single, massive dump. They might sell portions of their unlocked tokens during market rallies, accumulating during dips to reduce their average cost basis. This calculated distribution aims to realize profits without overly depressing the market.

3. Sophisticated hedging

Perhaps the most complex VC strategy involves hedging unlock exposure. Months before an unlock, VCs can enter into derivative contracts to lock in a selling price, effectively de-risking their position.

• Shorting futures and perpetual swaps: By taking a short position on a futures contract that mirrors the token’s price, VCs can profit from a price drop, offsetting potential losses from their unlocked tokens.

• Put options: Purchasing put options gives them the right to sell their tokens at a specific price, regardless of how low the market goes.

• Selling call options: Conversely, they might sell call options against their future unlock tokens, generating premium income while committing to sell at a certain price if the option is exercised.

• Delta-neutral strategies: VCs often work with market makers to create delta-neutral positions, where they hold their tokens but simultaneously take offsetting short positions in derivatives, ensuring they profit whether the price goes up or down.

VCs dumping tokens: What influences a VC’s decision to sell?

VCs don’t make decisions in a vacuum. Several factors dictate their approach to unlocked tokens:

• Market sentiment: If the broader crypto market is bearish or a project’s specific sentiment is negative, VCs are more likely to sell unlocked tokens to cut potential losses. Conversely, a bullish market might encourage them to hold longer or sell more gradually.

• Proportion of unlocked tokens: The larger the percentage of tokens unlocked relative to the existing circulating supply, the more likely VCs (and the market) are to anticipate selling pressure.

• Token recipient type: VCs differentiate between tokens unlocked for early investors/team members (who often have high profit motives) versus those for community rewards or staking, which tend to have less immediate selling pressure.

• Project fundamentals and milestones: A project hitting key development milestones or securing new partnerships can instill confidence, potentially leading VCs to hold for longer or sell less aggressively. Conversely, missed deadlines or negative news can trigger faster exits.

• Portfolio diversification: VCs manage entire portfolios of investments. Selling some unlocked tokens might be part of a broader strategy to rebalance their portfolio, realize gains to fund new investments or reduce exposure to a single asset.

Did you know? Team and early investor unlocks cause the sharpest price crashes, while ecosystem-building unlocks can actually boost price by roughly +1.2% on average.

VC crypto trading: Criticisms 

The power VCs wield over token unlocks isn’t without its critics. Concerns often revolve around perceived unfairness and market manipulation:

Misalignment of interests

Critics argue that time-scheduled unlocks create a fundamental imbalance between supply (fixed by schedule) and demand (volatile). VCs, who bought tokens at extremely low prices pre-token generation event (TGE), can often realize substantial profits even if the token price drops significantly after unlocks, while retail investors buying post-TGE bear the brunt of the selling pressure.

“Artificial” pump and dumps

Some accuse projects and VCs of coordinating “pump-and-dump” schemes, artificially inflating token prices through marketing or manufactured news before large unlocks, only to offload their tokens onto unsuspecting retail investors.

Information asymmetry

VCs typically have deeper insights into a project’s health, development roadmap and upcoming unlocks, creating an information advantage over retail investors.

However, it’s also important to acknowledge the vital role VCs play. They provide crucial early-stage capital that fuels innovation and development within the crypto ecosystem. Without VC funding, many promising projects might never get off the ground.

Lessons for retail investors: Trading strategies for crypto unlocks

While you might not have access to OTC desks or sophisticated hedging tools, you can still learn from VC behavior to make more informed decisions around token unlocks:

1. DYOR: Always check a project’s vesting schedule and unlock dates. Resources like Token Unlocks are invaluable for tracking these events. Understand how much supply will be released and who the recipients are.

2. Anticipate selling pressure: Assume that large unlocks, especially for early investors or teams, will likely lead to increased selling pressure. Consider reducing your exposure or setting stop-losses ahead of these events.

3. “Buy the rumor, sell the news” (or unlock): Prices often dip in anticipation of an unlock and then again after the actual event. Avoid buying right before a major unlock, hoping for a miracle.

4. Look for volume and price action: Pay attention to onchain movements. Large, unexplained transfers from known project or VC wallets to exchanges or OTC desks can signal impending sales. Look for unusual trading volume.

5. Understand project fundamentals: Not all unlocks are equally bearish. If a project is consistently hitting milestones, building strong partnerships and demonstrating real-world utility, its long-term potential might absorb some of the unlock pressure.

Token unlocks are inherent to the crypto market’s structure. By understanding the motivations and sophisticated strategies employed by VCs, retail investors can better navigate these volatile periods, transforming potential pitfalls into opportunities for smarter trading.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.