Why The Sandbox Token SAND Might Drop 35%
Summary
The Unlock on February 14, 2023, will likely harm the price of SAND tokens.
Historically, prior unlocks have seen the price of SAND decline by 20 to 35% within days following the unlock cliff.
Unlocked Advisors and Team tokens tend to go straight to the exchange according to on-chain data.
Thesis
On February 14, 2023, The Sandbox (SAND-USD) will unlock 12.419% of SAND tokens, valued at $308M. SAND tokens are likely to drop in price as they did following previous unlocks. This event also makes SAND a short candidate for experienced traders.
This supply unlock cliff had occurred three times before and resulted in significant drawdowns right after, which we will explore in our backward-looking analysis. However, history might not repeat itself as this unlock cliff will be a proportionally smaller percentage of the circulating supply than the previous unlocks.
We don’t know with certainty what all the groups entitled to the unlock will do with their liquid tokens. But, we will explore the possibilities and probabilities in this article and let our readers make up their minds on that possible path. Our base case is that there will be significant enough selling pressure to impact short-term prices negatively.
In our crypto career, we have witnessed many projects implode due to bad tokenomics while being decent projects. We are not particularly impressed by The Sandbox project, though we may be proven wrong in the future, given their massive investments in the space. As a result, we have often used events like this to make a profit.
SAND has 24.8% inflation incoming in the next six months (12.4% in a few days and an equal amount again in August 2023). We can not fight the apparent supply and demand imbalance and likely price destruction via dilution or sell pressure. We offer three options for our readers depending on their affinity to The Sandbox project.
- Do nothing; watch what happens, and then use the learnings in August.
- Sell your position now or short-sell to profit on the short-term volatility.
- Wait for the post-unlock price decline to acquire SAND tokens at a lower price.
What is Sandbox
The Sandbox is a blockchain-powered virtual environment where users may create, construct, purchase, and trade digital assets — NFTs in games. The Sandbox has developed a decentralized platform for the gaming community by combining the powers of decentralized autonomous organizations (DAO) with non-fungible tokens (NFTs). In other words, The Sandbox is a metaverse play. With the Sandbox platform, users can create, control, and sell their game experiences on the Ethereum blockchain using the ERC-20 SAND token, the platform’s main utility currency. The SAND utility token simplifies platform transactions and gains value with the adoption of the platform and the transaction demand.
According to the official whitepaper, the Sandbox platform’s primary goal is to incorporate blockchain technology into gaming. The platform aims to facilitate a creative “play-to-earn” approach that allows users to create and play games. Players, artists, and game designers can use The Sandbox’s free software, such as VoxEdit and Game Maker, to create ASSETs and experiences, such as games, dioramas, and art galleries, for themselves and/or to share with others. These creations can be monetized to generate passive income for the creator in the form of SAND tokens.
Minted SAND tokens will be distributed over time in six-month unlock cliffs and distributed to the entitled groups below.
Currently, 44.06% of the total supply of SAND tokens remains locked, with a total of 3 billion SAND tokens.
Previous Three Unlocks and the Price Impact
As we can see in the chart below, the unlock dates are the yellow lines and each time an unlock cliff occurred, the price declined in the following 3–7 days by up to -36%.
The first Unlock on August 16, 2021. We can see a ~20% drop in SAND price in the following 3 days. From $0.69 to $0.55.
During the second unlock on February 15, 2022, the price dropped 36% from $4.42 to $2.82 within 7 days following the unlock cliff.
During the third unlock on august 16, 2022 we can see a price drop from $1.32 to $1.01 within 7 days a 23% drop.
The fourth, unlock cliff forecast is an assumption that the trend will continue. At the time of writing February 7, 2023, the SAND token had appreciated to $0.94/SAND a +30% in one day. The jump seems to be attributed to a Linkedin announcement of a partnership with Saudi Arabia by Borget Sebastien, Co-Founder & COO of The Sandbox. If this price holds into the unlock we project a -34% drop to about $0.61 within 7 days following the unlock cliff. If the price retraces to the pre-announcement price of $0.75 we still expect a similar magnitude in percentage terms which would imply a price of about $0.50/SAND.
February 14, 2023: UNLOCK DISTRIBUTION
We will group the entitled token recipients into three groups that will act similarly. We will explain our logic in the following sections.
Group 1 — Investors — HODL
- Seed Sale: 103,080,000 SAND (3.44%)
- Strategic Sale 24,000,000 SAND (0.80%)
- Group 1 total: 127,080,000 SAND
Group 2 — Company & DAO — SELL A LITTLE
- Company Reserve 96,840,278 SAND (3.23%)
- Foundation 39,900,000 SAND (1.33%)
- Group 2 total: 136,740,278
Group 3 — Employees — SELL A LOT
- Advisors 37,500,000 SAND (1.25%)
- Team 71,250,000 SAND (2.38%)
- Group 3 total: 108,750,000 SAND
Our assumptions:
- Group 1: will not add much sell pressure during this unlock.
- Group 2: might sell a little to make opportunistic moves.
- Group 3: will add the most sell pressure after the unlock.
Group 1 — Investors
According to Crunchbase the “seed investors” gave $95M in exchange for 570,000,000 SAND. Making their average cost per SAND token equal to $0.16. This means that even at $0.32 they will be up 100% on their initial investment. Which is well above our bear case forecast.
The seed investors have had many opportunities to cash out at a handsome multiple:
- 4X at $0.69 during the first unlock of 103,080,000 SAND.
- All the way up to 47X at $7.91 during November of 2021 prior to the second unlock.
- During the second unlock the seed investors had the opportunity to get 26X times their investment at $4.42.
- And lastly, a 7.9 X at $1.32 after the third unlock.
Reasons investors won’t sell
- Reputation
Institutional reputation — is everything in the investment world, and if the VC gets a reputation as a fund that just dumps as soon as they can, they will shut themselves out of future opportunities as they would be labeled as a bad partner.
- Liquidity
Investors that sell large amounts don’t use regular exchanges like us plebs to transact. Public markets in crypto do not have the deep liquidity that institutional investors require to transact. If they were to sell a large amount on the open market, the price would free fall. And a free fall price is not in their interest; unless they also have a short leveraged derivative position. Investors often find a buyer and make the transaction privately off the public exchange.
- Philosophy
Some investors have a rigorous investment philosophy in early industries and companies. These investors often don’t sell for a minimum of 10 years, or sometimes the hold duration is forever.
Because of the reasons discussed above (Reputation, Liquidity, Philosophy), and the fact that the seed investors already had many opportunities to recoup their investment and outrageous gains, we don’t expect much selling pressure from Group 1 unless they are trying to manipulate the market to benefit from a short derivative position.
Group 2 — Company & DAO
The Sandbox has made strategic investments totaling over $500M from the company reserves and the foundation.
This suggested that some of the Group 2 tokens are often used to acquire complementary companies and to make seed investments in the blockchain gaming NFT space. Group 2 reserves are well capitalized from the previous unlock rounds and the many opportunities to liquidate SAND at far better prices, similar to Group 1. But, given the winter state of the crypto market, Group 2 might use the depressed prices as an opportunity to invest in competitive or complementary projects that are starved for cash. We will assign a non-zero probability that some portion of Group 2 tokens hits the market and add to sell pressure.
Group 3 — Employees
Because the SAND token is an ERC-20 on the Ethereum blockchain we can track all the transactions of the token using Etherscan, a blockchain explorer. According to Token Uunlocks 2022 report, the on-chain data from Etherscan shows that Advisors and Team instantly sent the tokens from the unlock to the exchange.
Looking at the Etherscan on-chain data in the last 12 days, the Advisors vault has moved 26M tokens out of the vault. Perhaps this move is to sell some SAND tokens prior to the upcoming token unlock and to capitalize on the recent price appreciation.
Advisors and Team are entitled to 108,750,000 SAND tokens in this upcoming unlock. We will assume the same outcome as previous unlocks and that these tokens will hit the exchanges as soon as they can and put significant downward pressure on the SAND token price. Because of the illiquidity of public exchanges, these tokens will slowly be sold over the coming days.
Below is a chart that shows unlock cliffs for the SAND token. After the green line, we can see the February 14 cliff and the liquid supply increase.
Vesting Schedule
The colors on the chart correspond to the entitled entities in the pie chart below.
The unlocks on the vesting schedule chart are all cliff unlocks. There is a diminishing impact in subsequent cliff unlocks as the unlock amount, even if constant, becomes a smaller portion of the liquid supply. The Token Unlocks chart from the 2022 report, shows the diminishing percentage impact of subsequent unlocks relative to the total liquid supply.
Our Forecast
- Bear: $0.32–0.48 — the price drops more than expected from previous unlocks.
- Base: $0.50 -0.61 — in line with expectations as price corrects to trend prior to unlocking.
- Bull: $ 0.70–0.80 price appreciates going into the unlock and the unlock has an expected -20% to -35% impact.
Final Words
Ethereum (ETH-USD) was created out of Vitalik’s frustrations with the world of warcraft video games, and the lack of digital ownership gamers traditionally had to put up with in legacy gaming environments.
We love the idea of the metaverse and gaming finally linking with blockchain technology. We are in the camp that gaming will be immensely important to the crypto industry and will likely be the catalyst that brings in the next wave of innovation and interest from the non-crypto crowd i.e. normies.
However, we are not sold on The Sandbox project. As ex-pro gamers, we currently don’t see anything interesting or of value in the Sandbox environment. Given their massive $500M investments in the blockchain/NFT gaming industry, there could be amazing things in the pipeline we are not aware of, and we hope they come to fruition.
Downward price pressure on the SAND token always follows the unlocked cliffs. History doesn’t have to repeat, but we believe it will likely rhyme, and the impact though less severe than previous unlocks due to diminishing liquid supply impact, will be negative.
This may present a short opportunity for event-driven traders or a lower entry price point for those HODLERS who believe in the Sandbox mission and approach to blockchain gaming. This event can serve as a valuable lesson for those who do not wish to act regardless of any current SAND position. Sitting on the sidelines as an observer is also a respectable option. There will be a cliff in another six months on August 14, 2023, where we can use these February learnings as another data point for our models to inform our actions for the August unlock.
The market is smart and getting smarter. Perhaps going forward thanks to tools like the token unlock website and social media alerts, traders and investors won’t be blindsided by the unlock and will price in the decline of SAND tokens well ahead of the unlock.
We caution against shorting or using leverage for any crypto including SAND due to extreme volatility in this asset class. It is easy enough to get extraordinary gains in this industry without taking on blow-up risk.
(Any views expressed in the article are the personal views of the author and should not form the basis for making investment decisions, nor be construed as a recommendation or advice to engage in investment transactions.)
