Crypto investors cash in on locked assets through trading loopholes

Crypto investors are cashing in on locked tokens through trading loopholes, using backdoor deals with market-making firms to turn restricted assets into liquid cash, according to a report from Bloomberg today.

Many of these tokens are supposed to remain off the market due to vesting schedules, but the report says investors are using over-the-counter (OTC) trades and other secondary market strategies to sidestep restrictions.

Venture capitalists and early backers stuck holding tokens they can’t sell for years, have been working with platforms like Wintermute, Flowdesk, and Caladan to move their assets.

Joshua Lim, Co-Head of Markets at FalconX, said 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, according to Flowdesk’s Chief Markets Officer David Bachelier. “While it’s not yet a fully functional two-way market, demand suggests significant potential for innovation and growth,” David reportedly told Bloomberg.

These trades are happening through many ways. Some investors transfer their token rights through a Safe Agreement for Future Tokens (SAFTs), basically selling the right to receive the tokens once they unlock.

Others use forward contracts, making deals to trade tokens at fixed future prices, which allows investors to hedge against price fluctuations, but they’re required to put up collateral to ensure delivery, according to Wintermute’s Global Head of Business Development and Partnerships Jonathan Chan.

Bloomberg says some investors are bypassing token project approval altogether, via ways to hedge locked tokens without permission, making this type of trading a sensitive topic in crypto circles.

A February report from Tokenomist shows that the five largest token unlocks in 2024 injected $5.4 billion worth of tokens into circulation. When large unlocks happen, holders often rush to cash out, which of course drives prices down, so the market makers are stepping in to ease the pressure.

Hedging strategies raises the crypto industry’s concerns

Not everyone is on board with the growing secondary market for locked assets. Some token issuers require explicit approval before an investor can transfer token rights. Despite that, the Bloomberg report says some deals are happening without oversight, raising concerns among crypto projects trying to enforce vesting agreements.

Will Leung, head of partnerships at Caladan, said these trades are about risk management, not violating agreements. “I think managing the risk around your balance sheet is very important,” he said. Websites like OFFX are also playing a role, brokering OTC and secondary market trades for locked assets. However, OFFX declined to comment on its activities.

Meanwhile, the crypto market has been volatile. Bitcoin, which hit a record high of $109,241 in January, has since dropped more than 25%. It has now rebounded to $81,600 at press time, as Ethereum is also dealing with similar turbulence, falling as low as $1,756 before recovering to $1,933. Lim said Bitcoin’s connection to traditional markets is making things worse. “Bitcoin’s correlation to equities is climbing to levels not seen since August 2024’s yen carry trade unwind,” said Lim.

Leveraged crypto ETFs also took a hit. Two ETFs linked to Strategy, the largest corporate Bitcoin holder on earth, fell more than 30% in a single day.

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