Crypto Liquidity Trap: Insiders Quit, Retail Investors Pay

The Crypto Liquidity Trap: Why 85% of 2025 Token Launches Are Underwater

The cryptocurrency market has undergone a significant shift in 2025, with over 80% of newly launched tokens currently trading below their initial valuations. This stark reality signals a waning appetite for venture-backed crypto projects and highlights a growing concern: a liquidity trap. Data from Memento Research reveals a troubling trend, with 84.7% of the 118 major token generation events (TGEs) tracked this year trading at a loss, and the median token down a staggering 71% from its launch price. This isn't simply a market correction; it's a systemic issue rooted in flawed tokenomics, a brutal macro environment, and a changing investment landscape.

Understanding the Drawdown: FDV vs. Market Capitalization

To grasp the severity of the current situation, it’s crucial to differentiate between market capitalization and Fully Diluted Valuation (FDV). Retail investors typically purchase the circulating supply – often just 10-15% of the total token allocation. However, the price of this limited float is increasingly dictated by the FDV, which represents the project’s total value once all venture capital (VC) and team tokens vest. This creates a significant disconnect between perceived value and actual liquidity.

Memento Research’s findings demonstrate that the “low float, high FDV” model – launching with a small circulating supply but a massive total valuation – has reached its limit. Projects that adopted this strategy, aiming for instant hype and high valuations, are now facing a harsh reality check. The report states: “Bigger launches did worse → the hyped, high-FDV token debuts dragged valuations down: 28 launches started ≥$1B FDV: 0% green, median drawdown roughly ~ -81%.”

The Impact of High FDVs: A Case Study of Berachain

High-profile projects with inflated FDVs, like Berachain, a layer-1 blockchain that generated considerable buzz, have experienced dramatic valuation compression post-launch. Berachain’s implied valuation plummeted from over $4 billion to approximately $300 million, illustrating the vulnerability of projects relying on unsustainable initial valuations. This demonstrates that initial hype doesn't guarantee long-term success, and inflated valuations are quickly corrected by market forces.

The Liquidity Vacuum and Macroeconomic Headwinds

The underperformance of these tokens isn’t solely attributable to poor tokenomics. A challenging macroeconomic environment has significantly impacted the broader crypto market. CryptoSlate data indicates a loss of approximately $1.2 trillion in market value between mid-October and late November. Bitcoin, while remaining the primary focus for institutional investment, experienced a 30% retracement from its $126,000 high to under $90,000.

This has created a tiered liquidity environment. The approval of Spot Bitcoin and Ethereum ETFs in the United States has successfully channeled capital into these established cryptocurrencies, but arguably at the expense of riskier, long-tail assets. Institutional allocators now have a regulated and liquid avenue for crypto exposure, reducing the need to diligence new protocols and manage complex custody risks. Jeff Dorman, CIO at Arca, points to this shift as a key driver of the TGE failure rate.

“I don’t know a single liquid fund that has bought a new token on TGE in over two years. That should probably tell you something,” Dorman stated. Without institutional participation to absorb selling pressure from airdrop recipients and market makers, prices are left with limited support and are prone to significant declines. Most TGEs launched in 2025 entered a liquidity vacuum, hoping for a retail frenzy that failed to materialize.

The Ethical Debate: Extraction vs. Value Creation

The consistent losses have reignited a debate about the ethics of the current crypto venture capital model. Critics argue that the industry has prioritized “extraction” over genuine value creation, incentivizing insiders to sell into limited liquidity before a project establishes a sustainable revenue model. Omid Malekan, a Columbia Business School professor, believes the market is now punishing this behavior.

“Raising too much money and pre-selling too many tokens destroys value in crypto. Going forward, teams that keep doing this do so knowingly. They care more about extracting a few dollars than achieving success,” Malekan explained. This highlights a fundamental flaw in the current system, where short-term gains for insiders often come at the expense of long-term project viability.

Outliers and Lessons Learned

Despite the widespread losses, some projects have bucked the trend, often due to unique catalysts. Aster, backed by Binance founder Changpeng Zhao, saw its valuation surge approximately 750% post-launch, growing from $675 million to over $5 billion. Similarly, projects like Humanity and Pieverse have maintained their value. However, a common thread among these winners is that none launched with an FDV exceeding $1 billion.

The market has demonstrated a willingness to support modest valuations with visible upside, while rejecting the “unicorn” premiums attached to unproven protocols. This suggests that realistic valuations and demonstrable utility are crucial for success in the current market environment.

Preparing for 2026: A Roadmap for Issuers and Investors

The failures of 2025 provide a clear roadmap for issuers and investors heading into 2026. The market has signaled it will no longer tolerate tokens that are merely fundraising mechanisms. The era of the “governance token” with no real utility is ending. Nathaniel Sokoll-Ward, co-founder of RWA platform Manifest Finance, describes the current token design as “cargo cult thinking.”

“What problem does the token solve that equity or a traditional cap structure doesn't? For most projects, the answer is nothing,” Sokoll-Ward questioned. Therefore, issuers must launch differently next year. The “Price to Reality” ratio needs to be reset, anchoring opening valuations to single-digit multiples of actual annualized fees. Furthermore, projects must “Float like a Business,” targeting initial floats of 15-25% to deepen liquidity and reduce volatility.

For investors, a behavioral shift is required. Memento Research’s Ash urges investors to treat TGEs as earnings reports, not lottery tickets. Investors should map the unlock schedule, verify market-maker terms, and track specific catalysts. Most importantly, patience is key. “I won't touch most launches until they retrace and let the airdrop fractal play out,” Ash advises.

The crypto market is maturing, and the days of easy gains fueled by hype are over. A focus on sustainable tokenomics, realistic valuations, and genuine utility will be essential for success in the years to come. The crypto liquidity trap of 2025 serves as a stark warning: investors and issuers alike must adapt to a new reality.

Mentioned in this article Bitcoin Ethereum Aster Berachain Binance Changpeng Zhao