Summary Avalanche has been one of the best-performing coins in the digital asset market, having more than tripled since September 2023. There will be a token unlock on February 21st, with 9.55 million AVAX valued at more than $400 million coming into circulation, 2.6% of the total supply. Historical unlocks don't necessarily provide a clear signal for how the coin typically reacts to token cliffs. But fundamentally, on-chain activity peaked in December. Avalanche ( AVAX-USD ) is a blockchain network that I've covered for Seeking Alpha a few times; most recently in September 2023. During that coverage, I gave my rationale for downgrading the network's native gas token AVAX from a "buy" to a "hold." Here's part of what I said in my closing summary: I still think there are interesting opportunities in the crypto market and Avalanche as a network continues to be one of those ideas. It's a fast chain that has integrations with many of the top protocols in the DeFi ecosystem. It serves a market that Ethereum requires secondary layers to serve at this current time. I'm not out of AVAX entirely, but I have trimmed my position on this adoption weakness and will reassess the idea again in the months to come. My critique of Avalanche in that September update focused mainly on a lack of network usage growth, as well as poor holder adoption among retail buyers and traders. Most of the AVAX coins are held by investors or whales, who presumably would like to sell occasionally to get partial exits on their investments. Upcoming Unlock AVAX Holder Cohorts (IntoTheBlock) There are currently 367.5 million AVAX tokens in circulation. Given the high level of whale and investor wallet addresses relative to some of the other large blockchain networks, I think it's fair to look at Avalanche again with token supply in mind. AVAX 2/15/24 (Token Unlocks) Approximately every quarter, AVAX holders get another token cliff that brings a little over 9.5 million coins out of lock and into the circulating supply. As of article submission, the next token unlock is February 21st 2024. Here's how the unlock breaks out by allocation cohort: Unlock Cohort AVAX USD Value Strategic Partners 2.25m $95.18m Foundation 1.67m $70.51m Team 4.50m $190.35m Airdrop 1.13m $47.59m Total 9.55m $403.63m Source: Token Unlocks 9.55 million AVAX tokens unlocking in a single day represents about 2.6% of the total current circulating supply of AVAX tokens. This is a fairly large unlock and given the more than 300% run that we've seen in AVAX since my last article, I wanted to look at the last 4 unlocks to see if we can find a pattern in how the price of AVAX typically reacts to the new supply. Prior Unlock Impact? Going back to the last year, we can find four cliff unlocks for Avalanche: Unlock Date AVAX Price 1mo Price 1mo Change 2mo Price 2mo Change February 28th 2023 $17.58 $16.51 -6.1% $17.46 -0.7% May 30th 2023 $14.44 $13.02 -9.8% $13.37 -7.4% August 27th 2023 $10.19 $8.92 -12.5% $10.59 3.9% November 25th 2023 $21.29 $48.36 127.1% $30.48 43.2% Source: IntoTheBlock, author's calculations The data in the table shows lower prices one month after the unlock three out of four times. The two-month change is a bit more mixed. Taking a longer term view of supply with price overlaid may give a better feel for the overall impact of token unlocks on immediate price; which is to say, there isn't generally a connection. AVAX Supply vs Price (IntoTheBlock) In the chart above, we can see examples of AVAX ripping higher after a big unlock, and we can see examples of AVAX falling apart after an unlock. This theoretically makes some sense. Cryptocurrencies are notoriously more volatile than stocks or commodities. A 2-3% intraday move in many of these digital assets is often normal. Given that, it is likely demand for the coin that is driving price more than supply issuance. Demand Source With a coin that has more than tripled in price over the last five months, the obvious question for prospective buyers would be where is this demand coming from for AVAX more recently. In September, I said the following: I think it could be reasonably argued that AVAX is functioning more as a pure speculative asset than as a utility coin used to pay gas for network activity. In my view, pure speculation is not generally a great reason for any digital asset to go up more than 300%. Getting under the hood, it appears, at least to me, that speculation is still the primary driver of AVAX returns since December. Avalanche: Transactions vs AVAX Price (Token Terminal) Most of the rally in AVAX over the last 5 months came in December, when the price moved from $21 per coin up to $50. At that time, this move had some fundamental merit, as transactions on the network were ripping higher. Between August and October, Avalanche transaction count averaged about 6.7 million per month. November produced over 29 million transactions and December topped 106 million. That month appears to have been a pretty significant outlier month. January transactions were back down to 14.3 million and midway through February the pace is inline with the August-October average. Avalanche: DAUs vs P/F Ratio (Token Terminal) We can also see active users in December never actually took out the summer highs of 1.1 million. Furthermore, the circulating price to fees ratio on Avalanche started ripping higher in mid-January, back over 900x fees. I'd consider this to be a rich valuation. AVAX-denominated TVL (DeFi Llama) Finally, Total Value Locked on the chain is still underwhelming at just 22 million AVAX. Adjusted for the dollar denominated price increase in the coin, Avalanche TVL is still near a 2.5 year low and stablecoin footprint year over year remains negative at little over $1.1 billion. Risks Like all cryptocurrencies, AVAX is a highly volatile asset that requires real on-chain utility to have a fundamental investment case. In December, that investment case looked phenomenal. However, over the last two months, there has not been much follow through in demand for the native token of the network. Though AVAX has a set supply, only about 51% of that supply is circulating, This means token dilution is a legitimate concern long term if the network can't grow usage. For a smart contract blockchain with over $1 billion in stablecoins, Avalanche's DeFi activity is disappointing. Digital asset buyers in general should remain mindful of their personal risk tolerances, with the understanding that the overwhelming majority of cryptocurrencies will likely produce negative total returns. Summary I'm still long AVAX personally, though I have taken profit in about half of my position. Avalanche is one of the blockchain networks that I've personally tried, and I've enjoyed the ease of use coupled with low fees. That said, there is quite a bit of competition in the fast/low fee blockchain arena and there is no guarantee Avalanche will be a long term winner. Going forward, I'd like to see meaningful growth in users, transactions, and stablecoin footprint before I'd entertain a larger position.
