Supply Overhang

A supply overhang exists when there is a large volume of tokens that are currently locked or held by early investors, which are expected to enter the market at some point in the future. This creates a psychological and economic pressure on the current price, as market participants are aware that the supply will eventually increase.

The overhang acts as a ceiling for the price, as the potential for dilution discourages aggressive long-term buying. Analysts must factor this into their valuation models, often discounting the current price to account for the future supply.

The severity of the overhang depends on the vesting schedule and the likelihood of the holders selling upon unlock. If the market perceives that the project has high utility and growth potential, the overhang may be absorbed without a significant price impact.

However, in weak market conditions, it can lead to a downward spiral in price. Understanding the magnitude and timing of the overhang is essential for managing risk in crypto portfolios.

It is a classic example of how supply dynamics influence market behavior.