The Big Reveal: How to Be a Market Maker in Level 1.5 Trading

Author: FC, Linda Zheng Zheng

Last month, we organized a Trader Day event in Singapore, where we invited the heads of three funds and exchanges to share how they made 100 times profit in the 1.5-level market, openly discussing the entire process from buying to selling.

At the end of this article, I will explain what 1.5-level trading is.

They are:
Ning Zhang, Founder of Bastion Trading @TheSkyBomber

Mark, Partner at Metrics Ventures @CryptoMark0727

Leo, Head of Strategic Investment at MEXC @zhao_eth

Question 1: Why do you choose the 1.5-level market for investment?

Ning: On one hand, the 2-level market is very competitive now, with a lot of funds and less liquidity, so we started exploring the 1.5-level; on the other hand, the 1.5-level market is now more mature. Although it is not much different from the secondary market, the 1.5-level market has lower risks and less uncertainty compared to the primary market.

Mark: The 1.5-level is more mature than projects that have not issued tokens in the 1-level, because tokens have already been issued, providing a data foundation from the market;
Investing in the 1.5-level is more mid-term compared to 2-level investments (buying tokens directly on exchanges), because buying tokens in the 1.5-level involves a lock-up period, requiring expectations and judgments about future market trends, liquidity, and project development.
Additionally, OTC trading mostly occurs at the end of bear markets and the beginning of bull markets. If you buy directly in the secondary market, you might face poor liquidity, causing a $1 million investment to push the price up by 30%.

At the bottom of the bear market, we proposed the concept of a "zero fund," buying a portfolio to sell at the beginning of the bull market, profiting from the transition between bull and bear markets.

Investment Representative Works

Leo: We started discussions with the TON Foundation in March 2023. "Once the other party finalized the integration with Telegram, we invested tens of millions of dollars," at that time $TON had not yet launched.

Mark: Based on the "zero fund" concept, we selected a token last year, $BEAM, for two reasons: it was a Binance Launchpool project but had a low valuation, and we previously worked with a gaming guild and later realized there were plans for a gaming public chain, collaborating with ImmutableX to issue games.

"What does this indicate? 1. This project is cheap enough, 2. The team is eager to increase its market value. We immediately decided to buy it at that time!"

Ning: "We bought a lot of $SOL," now publicly disclosed for the first time.

Question 2: OTC Merchants: "I can sell you tokens at a discount, what can you offer me in return?"

When we, as a primary fund, want to invest, projects might ask, "Why should I sell to you? Why you and not someone else?" However, in 1.5-level investments, this question usually does not exist; it is simply a matter of buying and selling.

However, different buyers may have different perspectives. Leo believes that if a project or foundation sells tokens to everyone at a 10%-30% discount equally, it indicates they haven't thought through what kind of investors they need, which is not meaningful.

So when they select 1.5-level projects, an important indicator is whether the sector can become a mainstream trend in this cycle and whether it can help improve the project. For example, the previous TON, when announcing OTC, had a weak ecosystem. As an exchange, we invested in it and assisted in listing, increasing the overall ecosystem's liquidity and activating users, which allows us to have good control over the results and confidence in making such 1.5-level investments.

Question 3: The 1.5-level market has a 1+3 unlocking cycle. Do you have any advice for investors?

Leo: This rule mainly emerged in this round. Previously, after a token was launched, 20% would be unlocked, and investors would sell everything within the following months, leading to significant selling pressure, which the market could not absorb, resulting in a double loss.

Ning: The 1+3 lock-up period is, on one hand, a form of self-regulation in the industry, and on the other hand, it affects the token's performance in the first year versus the following three years, as liquidity changes. Therefore, funds need to manage expectations and risk control for LPs financially.

Background Knowledge

What is the 1.5-level market?

The 1.5-level market, also known as OTC (Over-the-Counter Market), refers to a market where buyers and sellers negotiate directly rather than trading on public exchanges. It focuses on assets that have generated tokens but are still in a lock-up period.

Buyers and Sellers in the 1.5-level Market

Main sellers in the 1.5-level market: VC venture capital firms, crypto project teams, and foundations, aiming to secure early profits or manage selling pressure.
Buyers are divided into two categories: "long-term holders" (hodlers) who believe in the project's long-term development rather than short-term fluctuations;
and hedgers, who seek arbitrage through strategies like perpetual swaps.

Why is the 1.5-level becoming an active market?

The activity in the 1.5-level market is primarily driven by stakeholders having a strong motivation to sell. For example, a token priced at $1 on exchanges like Binance may only sell for $0.30 on OTC platforms, with a one-year lock-up period and an additional two years of monthly unlocks.

Source: Presto Research

This trend is related to the current market environment, where many projects have high FDV (Fully Diluted Valuation) and low liquidity, along with negative sentiment towards VC tokens. The 1.5-level market helps reduce immediate selling pressure on the market when tokens are unlocked, creating a more balanced environment.