Decoding the Secondary OTC Market: The Buyer’s Market Will Last Until 2025

*Original: * Min Jung

Compiled by: Golem, Odaily Planet Daily

Abstract

• The secondary OTC market is a place where people can buy and sell various assets, including locked tokens, equity, or SAFT (Simple Agreement for Future Tokens), which are difficult to trade on public exchanges. Nowadays, the term "secondary OTC market" mainly refers to the buying and selling of locked tokens.

• The main sellers in the secondary OTC market include VCs, project teams, and foundations, whose motivations often stem from the desire to realize early profits or manage sell-off pressure. Buyers are typically divided into two categories: "hodlers," who believe in the long-term potential of the tokens and are attracted by the token discounts, and hedgers, who profit from price discrepancies through financial means.

• The secondary OTC market is increasingly gaining attention as it reflects market pessimism, with tokens often sold at significant discounts due to limited buyer willingness. Nevertheless, the secondary OTC market still plays a crucial role in managing liquidity and reducing direct sell-off pressure on public exchanges, helping to establish a more stable and resilient crypto ecosystem.

Figure 1: Market Status, Source: imgflip

Although most retail investors are basically disconnected from the secondary OTC market, its importance is rapidly increasing among industry insiders such as VCs, project teams, and foundations. As the cryptocurrency market evolves dynamically, the secondary OTC market is becoming an important way to manage liquidity and lock in profits, especially in situations of high valuations but limited liquidity.

Therefore, this article will introduce:

1) What is the secondary OTC market,

2) Who are the participants and their motivations,

3) Some thoughts on the current market situation,

4) A written interview with Taran, founder of the OTC platform STIX.

What is the Secondary OTC Market

The secondary OTC (over-the-counter) market is a private trading space that allows buyers and sellers to negotiate and execute trades of assets such as tokens, equity, or investment contracts (like SAFT, Simple Agreement for Future Tokens) directly outside of public exchanges. For various reasons, most assets listed in the secondary OTC market cannot be traded on conventional exchanges like Binance or OKX.

Many crypto projects have tokens locked for a certain period, and the secondary OTC market provides a way for investors and teams to sell these assets before they become tradable (unlocked). Nowadays, the term "secondary OTC market" mainly refers to the buying and selling of locked tokens from TGE or even pre-TGE projects, and this article will focus on the buying and selling of locked tokens from TGE projects.

Figure 2: What the Secondary OTC Market Looks Like, Source: STIX

Why is the Secondary OTC Market Thriving

The main driving force behind the thriving secondary OTC market is the strong motivation of stakeholders to sell their held assets. Currently, many of the top 20 tokens are trading at nearly 50% discounts with a one-year lock-up period, while tokens from projects outside the top 100 are trading at discounts of up to 70%. For example, a token priced at $1 on exchanges like Binance may only sell for $0.3 on platforms like STIX, with a one-year lock-up period and an additional two years of monthly unlocks.

This trend is closely related to the recent high FDV, low circulation, and the market's growing aversion to VC tokens. As discussed in the article “Is FDV a Meme?,” although many new projects are entering the market, there are no corresponding new users or liquidity to support this massive supply. Therefore, as more tokens are unlocked, token prices naturally decline.

Moreover, many of these tokens provide little value to the market and are often overvalued relative to their actual user base and utility. The project teams and VCs that initially invested in these projects have recognized this, so they choose to sell at a discount now rather than risk lower future prices.

Figure 3: Existing Trades in the Market, Source: Presto Research

Participants in Buying and Selling and Their Motivations

Sellers and Their Reasons

• Project Teams

Even with a token sale discount rate of 50% to 70%, project teams can still profit. These project teams are usually small, typically consisting of 20-30 people, and they may have built the project in just 2-3 years. Despite a relatively short development cycle and limited initial investment, the FDV valuation of these projects can reach as high as $3 billion or more.

In Web2, it is almost impossible for such a small team to create a company worth $1.5 billion in such a short time. Given this situation, many projects tend to sell their tokens at a discount because they know it is the best opportunity to realize profits now rather than risk holding on and potentially seeing their value decline later.

• VCs

VCs face a similar situation to project teams. Recent market conditions have led to rapid valuation increases, with seed rounds often occurring six months after pre-seed rounds and at three times the valuation. In some cases, VCs even conduct multiple rounds of financing simultaneously, providing different valuations for concurrent investments. Therefore, unless they invest in the final stages before TGE, many VCs can still achieve substantial profits even when selling at a 50% discount in the secondary market.

The current market environment drives VCs to sell tokens to seize the opportunity to lock in profits. Additionally, in the current market environment, limited partners (LPs) in venture capital funds have begun to pay more attention to DPI (Distributions to Paid-In), further incentivizing VCs to realize returns, thus enhancing the trend of selling in the secondary OTC market.

• Foundations

The motivations of foundations participating in the secondary OTC market may differ slightly. While some foundations may recognize that their tokens are overvalued and want to sell quickly, others may strategically take over. A common strategy is to sell unlocked tokens to investors at a discount and impose a one-year lock-up.

This approach reduces direct sell-off pressure on the public market while still allowing the foundation to raise necessary operational funds. In many cases, this type of transaction can be seen as one of the positive uses of the secondary OTC market, as it meets the operational funding needs of the foundation while maintaining market stability.

Buyers and Their Reasons

• Hodlers

The first type of buyer in the secondary OTC market is those who believe in the long-term value of the tokens. These individuals are often referred to as "hodlers," who believe the project will succeed and are willing to buy tokens at a 50% discount with the intention of holding them for several years.

For these buyers, the opportunity to purchase tokens at a discount is very attractive because they plan to maintain their investment in the project long-term and expect the value of the tokens to increase as the project develops. High discount rates provide them with a favorable entry point, allowing them to accumulate more tokens at a lower cost.

• Hedgers

The second type of buyer is driven by the opportunity to profit from token discounts through strategic financial strategies. These buyers are known as hedgers, who use perpetual contracts and other financial instruments to lock in profits from discounted tokens. By purchasing tokens at a 50% discount and simultaneously shorting them, they can achieve returns equivalent to the discount.

Additionally, they can earn funding fees, which can further enhance returns if the rates are positive. This method allows hedgers to exploit price discrepancies between the secondary OTC market and the public market, making it a profitable strategy for those skilled in managing financial risks.

Why Can't Sellers Hedge Their Positions Like Buyers?

While it seems logical for sellers (such as VCs and project teams) to hedge their positions rather than sell at significant discounts, several factors make this approach impractical, such as regulatory barriers and liquidity constraints.

In terms of regulation, VCs often face strict rules that limit their ability to engage in certain financial activities, such as shorting tokens—an essential component of effective hedging strategies. Beyond these regulatory constraints, hedging itself requires substantial capital to avoid liquidation risks. Sellers need to provide significant collateral, often exceeding the value of the tokens they are trying to hedge, because while the downside potential of token prices is limited, the upside potential can be unlimited. This creates a situation where the financial requirements for hedging are prohibitively high, especially considering that most of the wealth of VCs and project teams is tied to the tokens themselves rather than liquid cash.

Moreover, hedging is not as straightforward as it appears. There are many complex factors to consider, such as counterparty risk (the possibility of platform failure or bankruptcy) and risks associated with funding rates, which may turn negative, complicating the strategy further and potentially leading to unexpected losses.

What Does the Current Situation of the Secondary OTC Market Mean?

Compared to public exchanges, the secondary OTC market currently exhibits a more pessimistic sentiment, as even when tokens are sold at significant discounts (sometimes up to 70%), it is still difficult to find buyers in the secondary OTC market. This sharply contrasts with public exchanges, where investors typically receive rewards for shorting tokens through positive funding fees. While understanding the intentions of secondary market participants is crucial, this trend may reflect the cautious attitude insiders are taking in response to the current situation.

Figure 4: The 1-Year Funding Rate for Most Tokens is Positive, Source: Coinglass

The Role of the Secondary OTC Market

Despite the bearish sentiment, the activity in the secondary OTC market is not entirely negative. In fact, the existence of an active secondary market plays a crucial role in the overall health of the broader crypto ecosystem. By facilitating the transfer of tokens between sellers and buyers, the secondary market allows traders to profit outside of traditional exchanges. This process can help mitigate the impact of large-scale token unlocks, which are often seen as bearish factors due to the increased sell-off pressure they bring to the market.

By conducting these transactions off-exchange, the secondary market reduces the direct sell-off pressure that retail investors face during token unlocks. This shift helps to establish a more stable and resilient market, where token unlocks no longer necessarily lead to significant price declines but instead support a healthier and more balanced market environment.

Conversation with Taran, Founder of STIX

STIX is an OTC platform for private cryptocurrency trading, and Taran is its founder. Established in early 2023, the platform's main sellers are team members, early investors, and treasuries looking to sell locked token positions, while the main buyers include whales, family offices, and hedge funds. Below is a written interview with Taran.

How do you see the evolving role of the secondary OTC market in the crypto industry?

The recent decline of new altcoins indicates that the prices of these protocols surged in early 2024 primarily due to their low circulation (demand exceeding supply). However, once the market turned risk-averse in the second quarter, these altcoins were severely impacted, with most falling over 75%. Many of these altcoins experienced massive ongoing unlocks, with unlocked tokens being immediately sold on the market, further affecting prices. Examples include Arbitrum, Starknet, Worldcoin, Wormhole, etc.

In the first and second quarters, these altcoins were also traded in large OTC transactions, primarily by early investors looking to reduce risk and allocate funds to more liquid assets (BTC, ETH, etc.), with prices 70-80% lower than their peaks. These data suggest that most altcoins are overvalued by at least 5 times, and as circulating supply increases, prices will further decline.

We have increased the transparency of OTC trading prices in 2024, which has drawn attention to the actual importance of the OTC market. Buyers have various opportunities to purchase distressed positions, and sellers have multiple opportunities to sell off-exchange without impacting the market. However, these transactions have a third party, namely the project teams, who can block off-exchange trades for certain reasons.

The following aspects play an important role in the secondary market:

• Removing active sellers from the equity structure to prevent them from selling on the public market
• Introducing new active holders with a higher cost basis
• Increasing the average cost basis of private holders
• Controlling future supply (introducing new unlock periods, etc.)
• Ensuring no private transactions and having complete visibility into off-exchange trades

What major trends do you currently see in the secondary OTC market?

Two major trends:

1) Treasuries of protocols that have not yet over-raised are now seeking to build their cash positions. We have supported multiple protocol treasuries to raise funds in the OTC market, where buyers purchase at lower prices (with unlocks over a certain period), while the treasury increases its cash reserves. This can achieve diversification, reduce risk, and ensure that teams have enough funds to outpace competitors.

2) For savvy trading firms, there are clear arbitrage opportunities: buying at lower prices off-exchange and hedging on exchanges, which often also consumes funding rates. This funding rate/off-exchange arbitrage exists in hundreds of altcoins and is a very profitable market-neutral trading strategy for mature trading firms.

Do you think the advantages of the buyer's market will continue? What are your short-term and long-term views?

I believe that the funding rate/off-exchange arbitrage for most altcoins will not end soon, as their vesting periods still have 2-3 years remaining, and most have positive funding rates.

The secondary market is very cyclical; in 2023, the vast majority of OTC trading volume was for pre-issue assets, primarily because many VC-funded protocols had not yet launched. Now that they have basically all launched, the market has shifted to trading locked tokens, which generally have spot/perpetual markets and a lot of data available for analysis, making the overall risk lower.

Because of the ongoing monthly unlocks, sellers can also choose to continue selling on exchanges to reduce risk rather than necessarily conducting off-exchange trades. However, assets still at dangerous prices (such as Ethena, Layerzero, IO.net, Aethir, etc.) still give the buyer's market an advantage.

If altcoins see a rise in September and October, many sellers will contact us on STIX hoping to sell, as they have realized that reducing risk is always wise. Many sellers who did not want to sell in the OTC market in the first quarter will now want to sell at lower prices than in the second or third quarters. However, I believe buyers are not very optimistic about these premiums either, so I think the buyer's market will continue until 2025.