The Low Float Trap: Why Some Small-Cap Tokens May Be Headed for a Reality Check

In the high-stakes realm of investing in cryptocurrencies, tokens with small market capitalizations and low trading floats have become a new favorite of fast-moving money.

These tokens currently bask in an aura of excitement, and rightly so: almost weekly, we learn about another token that’s been issuing not-so-well-kept secret dumbbell gains for its fortunate holders.

Of course, not all small-cap tokens have found that situation, and not all of them are busting out on the upside. But over the next few weeks and months, some of these tokens could turn a nice profit on their limited cap—if they can avoid going to zero, that is.

An analysis carried out recently shows that a cluster of seven small-cap tokens is trading at a valuation that exceeds their actual circulating market capitalizations by a degree of between 5 and 30 times. The situation is this way because these projects have less than 20% of their total token supply circulating. The vast majority of the tokens in question are still locked up. That was the state of affairs in the token economy when I sat down to write this. Such a low circulating supply coupled with a not-so-low demand can make the prices of assets rally in parabolic fashion. But one look at the next chart shows that appearances can be wildly deceptive.

For anyone moving through these waters, it’s vital to grasp the distinction between circulating market cap and fully diluted valuation (FDV). The circulating market cap conveys the value of tokens that are available for trading right now, while the FDV operates under the assumption that the entire supply is out there and priced at the current market rate. When there’s a big gap between these two figures, it’s a sign that much of the project’s apparently existing value is based on the promise of future token availability—tokens that, once unlocked, could change the market in significant ways.

Here is a more detailed examination of the seven tokens recognized as possibly being overextended in relation to their float:

– $SPEC and $NYAN: These two tokens are some of the most extreme cases, with circulating supplies of less than 5% of their total supply. Yet they trade at valuations 6–7 times higher than their market caps based on the supply that is currently available to trade. This means their prices are inflated. And if you look at the holders of these tokens, you see that many of them appear to be not quite ready to trade.

– $GUN: With just 7% of its token supply out for trading, $GUN currently has a fully diluted valuation (FDV) that is 16 times greater than its circulating cap. The token’s fundamentals may or may not justify this pricing, but any drop in hype could lead to some very quick and very painful corrections.

– $PUFFER and $XFI: These tokens, with circulating supplies of 8% and 13%, respectively, already command high valuations. $PUFFER is almost a $150 million FDV, and $XFI is close to $77 million. The kind of pricing that we’re seeing here leaves very little room for error, especially if these tokens don’t perform over time.

– $WEL: At 10 times its float-based value, the trading of $WEL shows that even down toward the lower end of the cap spectrum, market expectations are really stretched. It’s the smallest market cap of the bunch.

– $KMNO: With 82% of its supply locked, $KMNO has a market cap of $68 million. Not the most inflated of the group, it nonetheless raises red flags given how much supply is just waiting to come online.

This concern isn’t just speculation. Looking back, we can see that tokens with very high fully diluted valuations and a low amount of circulating supply have usually undergone large price drops when the token allocations became unlocked. These unlocks—like this one—are typically done on a set schedule during the month (once or twice in a month); in this case, the amount unlocked is over 200% of the normal scheduled unlocking amount. This is putting a lot of new tokens into the already oversupplied market.

Those involved in trading and investing should be cautious of what in crypto circles is known as the “low float trap.” These tokens might display ever so flashy moves in the early trading days when supply is limited, but the next phase is the real test. Once that artificial supply issue is resolved, can the prices maintain their level, or even push higher, if the projects backing the tokens aren’t delivering on strong fundamentals? Sustained price action isn’t a given and could yield the appearance of a long descent back to earth.

As tokenomics gets more and more important in crypto, we are starting to see that what is really behind a project is much more relevant to its valuation than what people were thinking 1 or 2 years ago. When you try to mess with the magic of numbers in crypto, you can see that there are certainly distortions happening out there.

Currently, these tokens are surfing the speculative wave. But when that wave carries them up to the top and then brings them crashing back down, the only ones likely to survive the storm that appears at this point are those with real staying power and good, supportive tokenomics.

Disclosure: This is not trading or investment advice. Always do your research before buying any cryptocurrency or investing in any services.

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