This is why massive crypto fundraising rounds often lead to token price crashes, and why high launch valuation isn’t a guarantee of success.
Historically speaking, in the crypto space, massive fundraising rounds where investors raise hundreds of millions are often treated as a victory.
When a project announces that it has secured 100 million, 500 million or even a billion in capital, the retail market usually reacts violently.
Most people think that if smart money is pouring in, the token must be destined for success. However, historical data tells a much darker story.
The Illusion of a Big Crypto Fundraising Round
Fundraising has always been the main way people judge a project. We see a headline about a project raising $500 million, and our brains compare that capital with guaranteed profit.
However, in the crypto space, capital is a double-edged sword. While having a large treasury provides the money to build properly, it also creates a massive valuation problem.
This is because when a project raises a multi-billion-dollar valuation with in-house investors, the public market has very little room left for growth.
By the time the token hits the average retailer’s wallet, the price pump has often already happened.
Token Performance After Huge Raises
To understand the relationship between fundraising and performance, let’s look at the numbers.
These are some of the biggest fundraisers in history, and the results are flashing a majorwarning for any investor.
The FTT token raised $1.75 billion and is down by around 97%. Celsius’ token ($CEL) raised $908 million and is currently down 99%.
And finally, the flow token raised $747 million and is down by 97%
The only exceptions are Ripple and Solana, which raised $795 million and $360 million, respectively.
As of writing, XRP is up 6000% while Solana is up 5000%.
The trend already presents itself at this point, because three out of the five largest fundraisers resulted in near-total losses for token holders.
This begs the question: If a project has nearly a billion dollars in the bank, then why does its token price collapse?
It turns out that there are specific reasons for this.
The Venture Capital Exit Liquidity Trap
When venture capitalists invest $100 million into a project, they want a massive profit. So in order to achieve this, the project tends to launch with a high valuation.
If the project is over-funded, the circulating supply at launch is usually small (becaue the whales have bought it all). And as these tokens unlock, these early backers start to take profits.
Retail investors then come later, lured in by the big raise headlines and end up becoming the exit liquidity for the professionals.
Related Reading: $11M Raised, Then Everything Changed: Why Trove Is Now Under Fire
The Burden of High Expectations
A project that raises $10 million can afford to fail and experiment. However, a project that raises $1 billion is under a microscope as people expect it to deliver a world-changing ecosystem immediately.
When the tech hits delays or the user base doesn’t scale fast, the price crashes and reality eventually catches up to the hype.
Another issue is the mismanagement that tends to come with excessive capital.
The FTX collapse was a major example of this because when money is too easy to get, discipline vanishes.
Because of this, instead of focusing on core development, funds go into aggressive marketing or celebrity endorsements. In some cases, they even lead to risk-taking that destroys the project’s balance sheet.
Source: https://www.livebitcoinnews.com/why-big-crypto-fundraising-often-leads-to-price-crashes/
