How OTC Token Deals Stack the Crypto Game Against Retail Traders

Crypto funds and market makers are buying tokens at steep discounts through private over-the-counter deals and hedging them with shorts, locking in double-digit returns while retail traders take the risk.

Venture capitalists, funds and market makers can often secure allocations at roughly a 30% discount with three- to four-month vesting, then hedge by shorting the same amount on perpetual futures markets, according to Jelle Buth, co-founder of market maker Enflux. 

This structure largely guarantees profits that can annualize to as much as 60%-120%, regardless of where the token price moves.

Buth said Enflux also participates in such deals, describing them as a popular practice for projects to raise capital and for investors to lock in returns. Retail traders who are excluded from these arrangements bear the selling pressure when hedges and unlocks hit the market.

“I would never want to be retail again,” Buth told Cointelegraph.

How OTC token deals work for funds and market makers

Over-the-counter (OTC) deals naturally tilt the market against retail traders, not only because of the selling pressure that impacts token prices, but also because they lack the transparency for a general investor to make informed decisions, Buth said.

Here’s how a sample OTC deal could play out. 

• An institutional investor partakes in a $500,000 deal as part of a $10 million raise.

• The investment is conducted through a token purchase at a 30% discount with a four-month vesting period.

• To hedge against price volatility, the investor opens an equal-sized short perp on futures markets.

• The price swings are offset, while the built-in discount locks in their profit once the tokens unlock.

• Because the 30% gain is realized over four months, the returns annualize to 90% APY.

In traditional finance, companies must disclose fundraising events through regulatory filings. If insiders or institutional investors receive discounted allocations, they typically show up in public filings. 

“Hedge funds have long bought into convertibles at a discount and neutralized their risk by shorting the underlying stock. The practice is not illegal, but in equities, it sits inside a thick wall of disclosure rules and trading restrictions,” Yuriy Brisov, partner at law firm Digital & Analogue Partners, told Cointelegraph.

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In crypto, projects don’t always disclose these terms. Announcements often claim that a project has raised $X million but omit that it came with discounted tokens and short vesting periods.

“Discounted OTC allocations are one of crypto’s worst-kept secrets,” Douglas Colkitt, a founding contributor at layer-1 blockchain Fogo, told Cointelegraph.

On paper, OTC discounts plus hedging look like risk-free trades. But in practice, perpetual futures can also work against investors. 

Unlike traditional futures contracts, perps don’t expire. Traders holding them must pay or receive a funding fee. When perp prices trade above spot price, shorts pay longs to maintain their position. That cost can steadily chip away at the discounted tokens’ profit margin.

“It has opportunity cost as well,” crypto management platform Glider founder Brian Huang told Cointelegraph. “That money could also be invested elsewhere during the vesting period.”

Why OTC remains the norm despite retail disadvantages

Despite the disadvantages for retail, OTC token deals remain entrenched because they serve both sides of the deal. 

For projects, private token sales are a quick way to secure millions in funding without the volatility of dumping tokens directly on the market. They provide a runway for product development, marketing or buybacks to help support the token’s price once unlocks arrive.

Related: Market maker deals are quietly killing crypto projects

For funds and market makers, they can deploy capital into tokens with predictable returns instead of locking money into risky pre-seed or equity rounds. 

Hedging with perpetual futures reduces exposure to market swings, and the built-in discount ensures a profit margin if funding rates don’t eat into it. 

“Many VCs don’t even bother with pre-seed anymore — they prefer liquid deals or tokens from established projects that they can trade right away,” Buth said. “When deals come with 12- or 24-month vesting, it’s much harder to close those rounds because the lockups are too long and the returns don’t meet that 60%-80% APY threshold investors expect.”

Ultimately, OTC deals persist because they align incentives for those who control the most money in crypto. Projects get instant liquidity, funds get high-yield trades, and retail investors are left reacting to price moves without ever seeing the terms that shaped them.

Democratizing the OTC deals for retail participants

The fundamental goal of a business is to profit. Buth said he doesn’t blame projects for offering OTC deals, nor funds for taking them. Enflux, like other market makers, is simply “playing the game.” Instead, he suggested that retail traders should understand what they are trading against since such deals lack the transparency of mature industries.

Colkitt said the consequences go further. He said OTC hedging and discounted allocations distort token prices, creating sell pressure that looks like weak demand. 

“It’s not the market deciding the project is bad. At the end of the day, it’s the mechanics of these deals themselves that’s the problem,” he said.

Meanwhile, such deals are increasingly appearing on fundraising platforms that allow retail investors to participate in once inaccessible deals. Huang said that the industry should expect an expansion of such venues.

Huang took a different view by arguing that transparency isn’t the issue. “The whole purpose of these deals is to have tokens trade hands without major impact to the token price,” he said. Instead, he suggests startups should prevent VCs from secondary token sales. 

For now, the imbalance persists against retail traders. OTC token deals continue to give projects and funds predictable profits, while the retail sector remains on the losing side of a game they never agreed to play. 

The best retail traders can do is recognize the asymmetry, factor in hidden sell pressure and adjust their strategies with the knowledge that they are trading against investors holding discounted stacks.

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