What Algorand’s Token Price Crash Can Teach Projects

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At 6 pm on June 19, the first Algorand dutch auction began. And in just four hours, 25 million Algo tokens were sold for $2.4 each, enabling Algo to raise $60 million dollars.

Since trading began in late June, the Algo token price has completely crashed in the secondary market. As of July 29, Algo’s lowest price was $0.58, which was about 75% lower than the highest point.

Due to the initial high demand, many Chinese retail investors who failed to participate in the Dutch auction bought Algo at a high level in the secondary market.  

But since the large plunge in the secondary market that drove the token price down more than half, the Chinese Algorand community has become even extremely disheartened.

Now Chinese investors are claiming that Algo is hurting retail folks and profiting from “chives”(retail folks), while the accusations of “Turing award winner cutting the chives” and “pyramid scheme” began to occur. The mood of the retail investors was so low to the extent that folks in the Algorand’s official WeChat community began asking almost every day, “When is Algo going to zero?”. Some investors have even began to directly call Algo “zerocoin.”

So why did the token price crash so quickly?

In its private sale round, sources have shared that Algorand’s investor terms was linear vesting over 730 days (~2 years). Apparently some of its private placement investors began selling after the token got listed. The private placement round price varied from $0.05 to $0.5. By the time the token got to the secondary market over the $2.40 price and seeing large profit taking opportunities, some investors whom have vested sold their existing holdings.

Silvio Micali, the founder of Algorand, and also MIT faculty and Turing Awards winner, has since been asking his investors to not sell their allocation and it is rumored that he threatened to change investor lock-up period terms or take legal action.

And while we wait for the second Dutch auction to occur, Algo has also been attempting to re-lift the spirits in its community, announcing numerous achievements such as Tether issuing USDT on the Algorand network, and Algorand becoming a member of the International Swap and Derivatives Association (ISDA). It also claimed that it has completed an audit of the reserve refund in cooperation with a Singapore insurance company (Singapore Assurance). Algorand CEO Steve Kokinos also came out to do live broadcasts of the community to answer user questions.

But is there still a chance for Algorand prices to bounce back?

We’ve translated some of the feedback from an Odaily interview from the investors who purchased Algo in the secondary market. Their responses were generally divided into 2 camps: one camp of investors has lost complete confidence and vouch to not touch Algo again. Another camp are investors whom have become increasingly more pessimistic, but hope that prices could be driven back up from the momentum of its pending second Dutch auction:

“I entered the market at $3, and now I have lost everything. Now I just kill it in my head and ignore it completely.” Says He Hai to Odaily Planet. He says that he has no hopes for Algorand’s second round of Dutch auction anymore.

Another buyer said: “I bought Algo for $3 and bought a total of $10,000 dollars worth. I still hold it now. There have been a lot of private placements sales but no community, so how can Algorand afford such a big market value?” He said that he has already abandoned Algo and doesn’t expect the coin to rise anymore. “The private investors have sold off too much, unless the project is willing to buy back the tokens from the market, there is no way to save this dip.”

This same buyer also says: “if Algorand was really focused on its technology, it would not have set its public offering price so high (Algorand Dutch auction price started at $10, while private placement price was $0.05).”Now he mentions that he has started shorting Algo on the exchange gate.io.

One investor said: “There is no point of talking about the technology when the price of currency doesn’t rise. If you were so focused on the technology, then you shouldn’t have issued tokens, or else your price will be manipulated by secondary market investors.”

One investor Leo said: “I bought $110,000 of Algo for $1.50, and I exited it when it was at $0.90.” 

Leo said that he will never touch Algo again. He said that the reason why he learned about this project was that it was mentioned by Binance. “I always thought that Binance reviewed all their project.” Because of Algo’s plunging, Leo’s good impression of Binance has died down as well.

Lastly, Shen Meng, who never purchased cryptocurrency before, heard about Algorand from a colleague and claimed half of her company bought the coin. Now she says she is waiting for the second round of Dutch auction.

“I bought it when I trusted my colleague. He got in at $2.6 and I followed him at $2.4 and is now waiting for the second round of auction to bring back the momentum. I’d be satisfied if I can exit with $1.”

There was one investment firm partner who also commented on Algorand- she was particularly optimistic about Algorand technology before and had vowed to hold Algo for a long time. Nevertheless, she has exited the market nonetheless. “In the long run, I think Algo should be okay, but I think it’s time to replace Algo with BTC.”

The prevailing view in the market was that the private placement investors didn’t have lockups, which caused the market crash.

On June 26, the Algorand foundation’s email sent to the investor community confirmed that speculation. Chen Fangfang, head of operations at Algorand Foundation, said in a letter to the investor community, that the Algorand Foundation has found that some recent actions by early supporters have injected unnecessary risks into the project, including dumping tokens, short selling, and other behaviors that have undermined the network performance and project’s trust.

She reminded investors of their obligation to not to take any action that is harmful to the project.

According to Crunchbase, Algorand had two rounds of financing before the official launch of the Dutch auction. The first round was led by USV and Pillar Companies, raising $4 million total. The second round was a private placement round in which Algo raised a total of $62mn at $0.05 per token. The investors there included Lemniscap, Kingsley Advani, Eterna Capital, VLane, and Polybius Capital.

According to sources, apparently the Algo team’s primary regrets in hindsight when going through this process were that 1) they did not expect the price of the Dutch auction to be so high and that, 2) they did not expect so many private investors to sell. The team apparently originally estimated the final auction price at around $0.8-1.2.

This is certainly a warning for projects to carefully pick their investors and also make sure their token is meticulously designed to avoid such pitfalls from happening.

One of Algo’s Australian node operators named Yawn commented: “the minimum threshold for the private placement rounds was pretty high, and some funds have even asked for more allocation. One way you could’ve interpreted this is that these investors weren’t in dire need of money and therefore shouldn’t have been so eager to sell in the secondary market.

Secondly, Yawn mentioned that the investor’s lockup terms should have abided by US laws and regulations, which could have filtered out some people who want to cash out. The team did not predict the pressure of so many investors selling all at once in the beginning.

Algorand had communicated with its investors and claimed that they monitoring everyone’s wallets. We will likely have to wait until the second auction to see if the token momentum returns.

This article was updated to correctly reflect the private placement investor terms with linear lockup.

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