Crypto Investors Cashing In on Locked Tokens

Crypto investors are exploiting trading loopholes to cash in on locked tokens through backdoor deals with market-making firms, according to a Bloomberg report.

Many tokens are meant to be restricted due to vesting schedules, but investors are using over-the-counter (OTC) trades and other secondary market strategies to circumvent these restrictions.

Venture capitalists and early supporters holding tokens they can’t sell for years are collaborating with platforms like Wintermute, Flowdesk, and Caladan to liquidate their assets.

Joshua Lim, Co-Head of Markets at FalconX, stated that they are “constructing two-sided books on these tokens that exist outside centralized exchanges” to help investors hedge their positions.

Market Makers Exploit Growing Demand

The secondary market for locked tokens has surged since mid-2023, as Flowdesk’s Chief Markets Officer, David Bachelier, noted. He remarked that while it’s not yet a fully functional two-way market, the existing demand signals potential for innovation and growth.

Trades are conducted in various ways. Some investors transfer rights via a Safe Agreement for Future Tokens (SAFTs), effectively selling the right to receive tokens once they become available.

Others employ forward contracts that allow them to deal tokens at fixed future prices while putting up collateral, which mitigates price fluctuations, according to Wintermute’s Global Head of Business Development and Partnerships, Jonathan Chan.

However, some traders are allegedly bypassing necessary approvals for token transactions, leading to concerns within crypto communities about the integrity of vesting agreements.

A February report from Tokenomist highlighted that the five largest token unlocks in 2024 projected an influx of $5.4 billion worth of tokens into the market. Large unlocks typically prompt holders to cash out, which can drive prices down, necessitating the intervention of market makers to stabilize conditions.

Hedging Strategies Raise Industry Concerns

Not all stakeholders support the burgeoning secondary market for locked assets. Certain token issuers mandate explicit approval for any transfer of rights. Despite this, the Bloomberg report asserts that some transactions are occurring without oversight, leading to apprehensions among crypto projects committed to enforcing vesting agreements.

Will Leung, Caladan’s head of partnerships, stressed that these trades focus on risk management rather than contract violations. “Managing the risk around your balance sheet is very important,” he commented. Websites like OFFX are also facilitating OTC and secondary market trades for these assets, though OFFX declined to disclose specific activities.

Currently, the crypto market experiences volatility. Bitcoin, which reached a peak of $109,241 in January, has since decreased over 25%, rebounding to $81,600 at last check. Ethereum also faced fluctuations, dropping to $1,756 before recovering to $1,933. Lim mentioned that Bitcoin is increasingly correlated with traditional markets, worsening the situation. “Bitcoin’s correlation to equities is climbing to levels not seen since the August 2024 yen carry trade unwind,” Lim pointed out.

Additionally, leveraged crypto ETFs suffered significant losses, with two ETFs linked to Strategy, the largest corporate Bitcoin holder, plunging over 30% in a single day.