ApeCoin is down 70%+ since the Otherside launch — Can Yuga Labs turn the ship around?

ApeCoin (APE), the new cryptocurrency that was recently launched by Yuga Labs, aims to be the bedrock of the Otherside Metaverse and recently the token has experienced massive volatility leading into and after its digital land sale. APE’s price dropped from $26 at the peak on Apr. 28 to $14 on May. 2 — more than 45% drop within a few days of the mint. The price has now dropped to the $6 range.

Given the current volatility, investors will be wondering if ApeCoin price will ever recover to its previous trading range. Let’s first take a look at the historic price trend, particularly what happened on the Otherdeed mint day; then take a deeper dive into the amount of APE that will be locked and released in the next three years. This will provide a better understanding of the supply and demand dynamics that could affect the price going forward.

ApeCoin surged after the Otherdeed announcement

In the first couple of days since APE’s listing on March 17, 2022, the price jumped from roughly $7 to $17 at the peak ; an increase of 143%! The price had since fluctuated between $10 to $15 until rumors began circulating of the Otherside Metaverse land sale.

APE historic hourly price since launch. Source: CoinGecko

The chart above shows APE made a sharp move up of almost 24% within a day from $13.16 to $16.30. When the Otherdeed rumours surfaced on Twitter on April 20, APE catapulted to $26 on April 28 after the sale was officially confirmed by OthersideMeta two days prior.

MAYC & BAYC average price, volume pre-mint. Source: OpenSea

The price of Yuga Lab’s Bored Ape Yacht Club (BAYC) and the Mutant Ape Yacht Club (MAYC) NFT also followed a similar pattern on April 20. MAYC reached all time high at 43 ETH on April 26 which was the day the sale was confirmed and BAYC started to bounce back from its 105 ETH low to a new all time high at 168 ETH on May 1.

Chaos ensued as Yuga confused users during the Otherdeed sale

Otherdeed was seen as an opportunity for new investors who have been priced out of BAYC, MAYC and BAKC to become part of the Ape community.

The bullish conviction toward APE was driven by the fact that it is the only currency in the Otherside Metaverse and the land sale in the secondary market would also be traded in APE in addition to ETH.

Investors who believed in Yuga Labs and the idea behind the Otherside Metaverse rushed to acquire APE in preparation for the mint at the price of 305 APE per plot. The increasing demand for APE as the minting date approached was broadly expected and the increase in price pre-mint was also foreseeable.

What came as a shock later on is how chaotic the whole process of minting Otherdeeds was. APE’s price plunged from $24 to $14 on May 2 which reflected a more than 40% decrease in two days! The immediate price drop to $20 on the day of the mint could be explained by the sudden decrease in demand for APE after the mint started.

A further 30% drop in the following two days is a clear reflection of investors’ loss of confidence in the project after the mint debacle. BAYC and MAYC price also reflected the same sentiment by falling more than the market value of the airdropped Otherdeed.

Despite efforts made by the Otherside team to verify new investors through a KYC (know-your-customer) process before the mint and to offer the sale at a fixed price, these measures were not enough to prevent a gas war. Information was not clear and sometimes plain wrong prior to the mint and a significant amount of money has been mis-spent and burnt on gas as a result of the poor communication by Yuga Labs.

What follows are some of the major issues encountered by investors on the day of the mint.

What happened to the Dutch Auction?

On April 26, OthersideMeta tweeted that the mint would be a Dutch auction but three days later they changed their mind and said “Dutch auctions are actually bullshit,” a complete pivot and a brutal slap in the face to investors.

A Dutch auction would have been an effective way to mitigate gas wars due to its unique design of a very high start price and a decreasing price over time. Investors could have chosen to mint at the price they could afford at different times, avoiding everyone minting at the same time, at the same price, and creating a gas war.

The delayed mint created additional problems

After the team delayed the mint date, APE price experienced some of the largest hourly downside re-pricings.

The below hourly chart shows APE increased slightly in the first three hours after the original planned mint time, then dropped from $22 all the way to $18 by the time the actual mint took place at 9 p.m. EST.

It is hard to say if the delay exacerbated the downward pressure, but the price fluctuation in APE significantly increased the risks taken by investors, especially when the mint was not even guaranteed for the KYC’d wallet holders.

APE price dropped by 18% from the original mint time to the actual mint time. Source: TradingView

The guaranteed mint for KYC’d wallets vanished

This was the biggest issue and misunderstanding in the whole minting process. Based on Otherside’s article, at the start of the sale (wave 1) each KYC’d wallet would only be allowed to mint 2 plots. Once the gas fee came down, the limit would rise to an additional 4 NFTs (wave 2). Since the number of KYC’d wallets are not disclosed to the public and there is only a fixed amount of plots to mint, it is uncertain whether all KYC’d wallets could mint at least one.

Assuming a maximum of 6 plots of land per wallet given the total of 55,000 plots, to guarantee each wallet can mint at least one plot, the maximum number of KYC wallets allowed should be 9,166.

It turned out there were far more KYC’d wallets than this number and many investors failed to mint anything after paying a very high price to acquire APE and experiencing stratospheric gas fees during the mint.

Gas fees skyrocketed during the actual mint

Wave 1 and 2 were designed to mitigate the gas war by limiting the number of plots each wallet can mint. The problem was the total number of KYC’d wallets was too large. The number of people rushing to mint at the same time was not reduced and gas fees never came down. While the early minted NFTs were selling in the secondary market for 2 or 3 times more than the cost of the mint, the demand for further mints and the ferocious gas war continued until the entire 55,000 plots were gone. Numerous users paid between 2.6 ETH to 5 ETH for gas fees during the process and many losing their entire fee due to transaction failures across the Ethereum network

Related: ETH gas price surges as Yuga Labs cashes in $300M selling Otherside NFTs

Continuous supply increase adds downside pressure to APE price

According to OthersideMeta, all APE earned during the mint will be locked up for 1 year. This is over 16 million APE (55,000 * 305) taken out of the circulating supply. Will this reduction in supply save the APE price? Unfortunately not. Compared to the amount of APE being unlocked and released into the market every month, 16 million is a drop in the ocean.

Looking at the amount of APE that will be unlocked in the next three years on a monthly basis, the majority of the supply comes from the DAO Treasury and Yuga Labs. There are also three large pumps in supply from the contributors in September 2022, March and September 2023.

APE coin monthly additional supply amount. Source: ApeCoin

On a cumulative basis, the initial amount of APE unlocked at launch day dominates the proportion of supply until May 2025, when it is overtaken by the DAO Treasury. At the rate of 7.3 million APE being unlocked per month for 48 months until 2026, the DAO treasury’s allocation is the main source of additional APE inflation.

APE coin cumulative supply breakdown in % by allocated groups. Source: ApeCoin

Given the estimated circulating supply of APE in April 2022 is around 284 million, the 16 million APE locked up from the Otherdeed land sale is only 5.9%. Such a small amount of one-time supply reduction is unlikely to have a long-lasting effect on the APE price, especially when supply keeps increasing.

APE locked-up from Otherdeed vs. cumulative monthly supply. Source: ApeCoin and Otherside

Trading volume is the only potential saviour for APE price

In addition to APE’s circulating supply, the trading volume is also a crucial factor in determining the future price. Using the ratio of trading volume to circulating supply (utilisation ratio), one can often find a relationship with price.

The chart below uses a simple linear regression to show the correlation between the APE utilisation ratio and price. In March 2022 when the circulating supply is relatively small, the higher the utilisation ratio the lower the price. On the contrary, in April 2022 when the circulating supply becomes larger, the higher the utilisation ratio the higher the price.

APE price vs. utilisation (trading volume / circulating supply). Source: CoinGecko API

If the positive correlation between the utilisation ratio and the price holds true while circulating supply keeps increasing gradually, it seems the only saviour for the APE price is an increasing amount of trading volume.

However, APE will struggle to attract more trading volume after the chaotic Otherdeed land sale. Yuga Lab’s tweet about turning off lights on Ethereum and building their own chain seems to have exacerbated the investors’ loss of confidence.

The implications of this tweet are profound. Ethereum has a long, stable track record of security and stability, designed and built by, arguably, the smartest and most established crypto talents in the world. It is more than concerning if Yuga Labs moves away from Ethereum and people have rightly ridiculed this on Twitter.

Yuga’s NFT collections derive their extreme valuations largely because they sit on Ethereum and users trust the network to hold their highly valued NFTs. How would any migration away from Ethereum take place? Would users trust a home grown chain from Yuga Labs? No other chain has tokens trading in the price strata as the blue chips that trade on Ethereum.

It would be reasonable to assume that APE and Ape-related NFTs could significantly re-price from their meteoric valuations if Yuga Labs was to follow through with the idea of managing their own chain to house their collections. We have seen what happened with Axie Infinity on the Ronin chain. APE could be up for a bumpy road ahead.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading move involves risk, you should conduct your own research when making a decision.