Yikes! Lots of ICP coming to market

A short term and medium term look at ICP price

Dec 06, 2021

tldr – I think it’s likely that you will be able to buy ICP for $17 sometime in the first half of 2022.

I usually avoid discussing the price of ICP, primarily because I’m an 8-year staker and daily, weekly or even monthly ICP price changes have no effect on my investment thesis. However, there’s an elephant in the room that should be acknowledged… a lot of new ICP supply will be coming to the market in the coming months.

Background

For the months of July – December this year, a fairly consistent 2M ICP has dissolved off the NNS, while an average of 0.5M has been newly staked each month. The net difference of this (1.5M ICP) is newly liquid ICP that the market has absorbed through new demand for ICP. The supply-demand balance for this 1.5M ICP monthly supply increase seems to occur around $40 - $55 per ICP, as that has been the steady trading range for most of the second half of this year, with a few noticeable exceptions in August and September (above range) and recently (below range).

However, in the first half of 2022, a significantly higher number of ICP will be dissolving off the NNS. Instead of 2M ICP each month dissolving, we will see 5-6M each month for the first half of 2022. This is because five large neurons are dissolving (4008-4012), one dissolving each month starting in December. Each of these neurons has over 3.5M ICP in them.

What is likely to happen with all of that dissolving ICP?

These neurons are part of a larger grouping of neurons (4001-4036). Wenzel Bartlett (@BartlettWenzel) was the first to suggest to me that this group of neurons are ICP for equity awards to Dfinity employees. The transaction logs suggest this is the case for reasons I will explain in another post. Neurons 4001-4007 have dissolved already and their transaction history is suggestive of what will happen when neurons 4008-4012 dissolve. Specifically, over the course of 4-8 weeks all of the dissolved ICP will be moved. These moves look to happen in batches, usually separated by 2 weeks. Following the transaction logs, much of that ICP ends up at exchanges, while some ends up re-staked in neurons, usually 8-year neurons.

[Small aside, if neurons 4001-4036 are in fact Dfinity employee equity compensation, then let’s give some credit to Dfinity employees… they are already leveraged into the Internet Computer through their employment, but they are also amplifying that leverage through re-staking their equity awards back into the IC at 8-year dissolves! And I know some people might think more should be staked by Dfinity employees, but remember there are tax implications for equity awards, not to mention the risks involved in keeping your net worth tied to your employer.]

In summary, I believe it is a safe assumption that a majority of the ICP in neurons 4008-4012 will hit the markets, greatly increasing the supply of ICP hitting the liquid market.

What’s the Impact of This Supply Pressure?

If we consider $40-$55 ICP as the price in which the liquid market has stabilized, then new demand for ICP has been relevantly equal to new supply over the past 6 months. This new demand is equal to $60M on the low end (1.5M ICP x $40/ICP) and $82.5M on the high end (1.5 x 55).

Approximately 3.5M additional ICP will hit the market in the months from December 2021 – May 2022, meaning a total of 5M ICP in new supply (assuming new staking remains consistent with trends over the past 6 months). Let’s explore three scenarios:

1. Demand for ICP in the next 6 months remains equal to demand over the past 6 months.

2. Demand for ICP in the next 6 months doubles that of demand for ICP over the past 6 months.

3. Demand for ICP in the next 6 months is 5x demand for ICP over the past 6 months.

Scenario 1 seems unlikely due to the success of NFTs recently and the potential for defi on the IC now that canisters can hold ICP. However, if demand were to remain at the same levels as the past 6 months, then the 5M monthly ICP would need to be absorbed by $60M on the low end or $82.5M on the high end. This would result in an average ICP price of $12 - $16.5.

Scenario 2 seems likely given the early success of NFTs and the potential success of defi on the Internet Computer, particularly keeping in mind that defi projects may take a few months to launch. In this scenario, the extra supply of ICP is absorbed by $120M - $165M in new monthly demand for ICP, resulting in a price range of $24 - $33 between December 2021 and May 2022.

Scenario 3 is a bullish case for the Internet Computer and assumes defi is successful early and the possibility of excitement and projects around bitcoin integration early in 2Q2022. In this scenario, $300M - $412M new demand buys ICP each month, resulting in a price range of $60 – $82.5 in the first half of 2022.

My 2 cents

I personally believe that scenario 1 will play out for the months of December and January and the result will be a $17 price tag for ICP at some point in January. Moving forward though, I anticipate that scenario 2 will play out for much of the first half of 2022. That is a time when I will be drastically increasing my ICP buys and 8-year staking, preparing for what I believe will be a huge increase in demand in the second half of 2022 and for many years to come. If that plays out, then expect a massive supply squeeze on ICP in 2024… something I will write about another day.

Let me know your thoughts in the comments below.