dilution between private and public investors

Dilution Between Public and Private Investors

Last Updated on October 6, 2023

In the burgeoning world of cryptocurrency projects, the actions and decisions of early investors can have far-reaching consequences on the token’s value, investor trust, and the long-term success of the project.

When tokens acquired at a low cost by seed investors become publicly tradable, it can trigger a chain of events that reverberate through the market.

The repercussions of such events not only affect the immediate token price but can also significantly impact the trust and confidence of subsequent investors.

Additionally, they can create a misalignment of interests that challenges the long-term sustainability of the project.

This article will delve into these crucial aspects of price pressure, investor trust, and incentive alignment, shedding light on the complexities of early investment decisions in crypto projects.

Key Takeaways

  1. Early investors’ actions can significantly impact a cryptocurrency project’s success.
  2. The misalignment of interests between early and public investors can challenge the sustainability of the project.
  3. Effective tokenomics can mitigate dilution, build investor trust, and align incentives for long-term project success.
  4. As experts in tokenomics, we can assist in crafting a robust, sustainable strategy for your project.

Price Pressure

When a token becomes publicly tradable, the actions of early investors can exert a strong influence on its price.

If seed investors, who secured tokens at a much lower price, decide to cash in on their investment, it can flood the market with tokens.

This oversupply can push down the token’s price due to simple supply-demand dynamics.

For public sale investors who entered at a higher price point, this rapid depreciation can lead to significant financial losses.

They may find themselves ‘underwater’ on their investment, holding tokens that are worth less than what they paid for them, which can further fuel selling pressure and exacerbate the drop in price.

Investor Trust and Confidence

A substantial price disparity between the seed investment round and the public sale can seriously undermine trust among later-stage investors.

They might perceive the discrepancy as an unfair advantage bestowed upon early investors, at the cost of those coming in later.

Such a perception can erode investor confidence in the fairness and transparency of the project.

This erosion of trust can make it more difficult for the project to attract investment and support in the future, potentially hampering its ability to raise necessary capital for growth and development.

Incentive Misalignment

Early investors, who secured tokens at a low price, stand to make substantial profits with even moderate price increases.

If they sell their tokens for quick profits, their interest in the project’s long-term success could diminish.

This scenario can lead to a misalignment of incentives between early investors and the project founders or later investors who are invested in the long-term growth and success of the project.

Such a misalignment can be detrimental to a project’s sustainability. It can encourage short-term thinking and potentially undermine decisions or initiatives aimed at fostering long-term growth and value creation.

Good Tokenomics Help by:

  • Setting a fair and reasonable price for the token at each stage of investment is crucial. If the price difference between rounds is too significant, it will lead to dilution.
  • Having a vesting schedule that limits when investors can sell their tokens after the project’s launch, preventing early investors from immediately selling for a quick profit and flooding the market is key when designing sustainable tokenomics.
  • Ensuring the incentives of early and public investors align with the long-term success of the project is vital. This could involve rewarding long-term holding with additional token allocations (like quadratic vesting) or other benefits to discourage early sell-offs.
  • Being clear and transparent about the project’s tokenomics from the start can help build trust with the public. This includes details about token supply, pricing, vesting, and any potential for future token emissions.

With a deep understanding of the delicate interplay between early investors’ actions, token price, investor trust, and project longevity, we can assist in crafting robust, sustainable tokenomics that minimize investor dilution.

By helping to set fair token prices, implement strategic vesting schedules, align incentives for long-term project success, and ensure transparency, we aim to build investor trust and confidence.

Our expertise extends to the careful management of token supply, pricing dynamics, and future token emission strategies, at the end creating a healthy token ecosystem.

Navigating the complicated world of cryptocurrencies is not easy, so allow Black Tokenomics to be your trusted partner in crafting a strong and resilient foundation for your project’s future.

Further Reading and Services

To better equip you for the challenges of the dynamic crypto landscape, we invite you to delve into our expertly crafted articles and tools.

Explore how supply shocks can drastically impact token price and disrupt the balance of supply and demand. Understanding these dynamics can better prepare you for unexpected events, using real-world examples from projects like Optimism, Immutable X, Sandbox, and Axie Infinity.

Learn about the critical role liquidity plays in token design. Thoughtfully constructed liquidity models can safeguard your project from volatile token prices and ultimately ensure its success.

For a deeper understanding of various theoretical models used in the crypto world, refer to our detailed articles on Monte Carlo Simulations, Game Theory, and the Quantity Theory of Money in Tokenomics Design.

At BlackTokenomics, we understand the intricacies and challenges of the crypto world. Our range of services such as Designing your Tokenomics from scratch, Auditing your existing tokenomics model, and Expert Tokenomics Advice is geared to help you navigate this intricate landscape with confidence.

Whether you are a seasoned investor or a project founder, our knowledge base and tailored services are here to guide you towards making informed and strategic decisions. Remember, success in this field requires a deep understanding of various factors, and BlackTokenomics is here to equip you with just that.

Disclaimer: This article and all resources, threads, models, and materials linked to within are for informational purposes only. None of this article’s contents, nor the contents linked to within, should be construed as legal advice, financial advice, technical advice, investment advice, accounting advice, or representations in any way regarding legal, technical, financial, investment, or accounting matters by the author and Blacktokenomics. The author and Blacktokenomics is not a lawyer or financial advisor in any jurisdiction, and highly encourages readers to engage with registered professionals to ensure compliance with any and all relevant laws and regulations.


Picture of Domas Golysenko
Domas Golysenko
Research Department Lead

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