Supply Overhang
Supply overhang is the risk that a large quantity of tokens that cannot be sold yet, or is held by a few parties, will become available later and weigh on the market price. It is a potential supply problem, not a guaranteed price drop.
Where overhang comes from
The most common source is locked tokens. Many projects launch with only a small part of their total supply in circulation, while the rest belongs to the team, investors and treasury and unlocks over the following years. Every one of those future unlocks is supply that the market will eventually have to absorb.
Overhang can also come from large known holders who may need or want to sell: a project treasury that pays its costs in tokens, a bankruptcy estate distributing coins to creditors, or a government that has seized coins and may auction them.
How to measure it
A quick first check is the gap between market capitalization, based on circulating supply, and fully diluted valuation (FDV), based on the total or maximum supply. If circulating supply is a small fraction of the total, a lot of future supply is waiting.
Then look at timing and size. Compare upcoming unlocks with circulating supply and with typical daily trading volume. An unlock worth a few hours of volume is very different from one worth several weeks.
An example
Say a token has 1,000,000,000 total supply but only 150,000,000 in circulation, at a price of 1 dollar. Market cap is 150 million dollars, FDV is 1 billion. That means 850,000,000 tokens, more than five times the current float, are still to come. If 100,000,000 of them unlock in six months and the token trades 5 million dollars a day, the market would need many days of normal volume just to absorb that one unlock if recipients sold.
Limits of the concept and common mistakes
Overhang describes pressure that might appear, not selling that will happen. Recipients may hold or stake, and widely known unlocks are often partly priced in before the date. Demand can also grow alongside supply.
The mistake in the other direction is to look only at market cap and ignore FDV. A token can look cheap by market cap while its price has to hold up under several times more supply over the coming years. Check the unlock schedule, who the recipients are, and whether tokens moved to exchanges after earlier unlocks.
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Frequently asked questions
How do I know if a token has a large supply overhang?
Compare circulating supply with total supply and market cap with FDV, then check the unlock calendar. A small circulating share and big upcoming unlocks relative to trading volume point to a large overhang.
Does supply overhang always lead to falling prices?
No. It increases the supply that could be sold, but price depends on how much is actually sold and how strong demand is at the time.
Is a high FDV the same as supply overhang?
Not exactly. A high FDV compared with market cap shows that much supply is not yet circulating, which is the main source of overhang. Overhang also includes large existing holders who may sell.
Related terms
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