A token lockup is an important concept that every crypto investor should understand – read on to get to know what it means!
What Is A Token Lockup?
The term “token lockup” refers to a period of time during which cryptocurrency tokens cannot be traded or transferred. This technique is often employed as a means of stabilizing the long-term value of an asset and preventing major holders from dumping large amounts of tokens onto the market, which could result in a rapid decrease in price.
Note that some crypto enthusiasts utilized the term “vesting period” to refer to the same concept as described by the token lockup definition, so you are likely to see these expressions used interchangeably.
What You Need To Know About Token Lockups
You are likely to encounter a token lockup after an Initial Coin Offering (ICO). This is due to the fact that significant sell-offs often happen after such events because early investors, including project team members, sell their holdings, causing a drastic decrease in price.
Thus, the goal of vesting periods following ICOs is to provide potential token sale participants with added confidence in the project. While the length of this measure differs depending on the specific project, a common token lockup timeframe is anywhere between one to two years after the launch of a cryptocurrency.
For example, if a startup creates a cryptocurrency and launches it via an ICO, the team may set a two-year token lockup, which means that no team member will have access to their tokens until the end of this period.
Such a solution typically brings a positive sentiment to the project and the people involved in it as it motivates them to focus on long-term work and reduces their concerns about the current market value of the tokens.
It’s important to note that tokens that are locked up are not included in the circulating supply and therefore are not considered in technical analysis carried out by traders and chartists.
