Unsold tokens is one of the first key facts ICO investors tend to check when coming across a new whitepaper from an ICO that they are considering investing in. The reason is simple: what happens to unsold tokens will have great impact on supply and demand of the token, which in turn affects the valuation and marketcap of the project.
Supply and demand in crypto
Why is it that supply and demand are so important in crypto then? It’s because of the economic factors:
- Supply and demand are the most fundamental factors affecting market price in all asset classes
- Lowering supply will increase the price and vice versa
- Lowering demand will decrease the price and vice versa
In case of Bitcoin, the supply is limited and there is a growing demand for it globally - hence the price trend of Bitcoin has been upwards for the last few years. If there was enough supply of Bitcoin for everyone in the world, there would be much less competition for buying them which would lead to a decrease in the price.
By now it should be clear to you why the fate of unsold tokens is one of the biggest questions in ICO investor’s mind. Let’s say that your ICO raises a total of 10 million usd with a softcap of 5 million usd and hardcap of 20 million usd, and decides to burn all the unsold tokens. From investor’s point of view, this is very appealing as the total supply of tokens would be decreased by 50%. If the demand for your tokens stays the same, the in theory the demand-supply dynamic will push your token price twice as high compared to what it would have been without burning the unsold tokens!
Other appealing ways to decrease supply
Burning unsold tokens is not the only way to restrict supply though: many ICOs are implementing token buyback programs, where demand-supply dynamic is positively affected after the ICO in favour of token holders. A good example of token buy-and-burn is Binance Coin BNB. Binance Coin (BNB) has experienced an impressive amount of growth since Binance started operating as an exchange. Their token buyback program operates so that each quarter Binance uses 20% of the total profits make through exchange fees to buyback and burn those BNB coins out of circulation and total supply. Each time the burning is conducted, token supply is dramatically decreased resulting in increase of the token price. This incentivizes the investors to hold their tokens for long-term, resulting in further growth of the token price as there are less BNB coins available for sale.
If you are an ICO founder, it is recommended to:
A. Carefully plan what happens to the unsold tokens as you can see from the token price dynamics explained in this post.
B. If it makes sense based on the nature of your ICO, consider implementing a token buyback program.
C. Like in all communication, transparency is key - don’t keep your investors guessing what happens to your unsold tokens, but rather address it openly!