This article gives a broad overview not only of Marsbase, but also the OTC industry in general. It will be especially interesting and useful to read to everyone who has not yet encountered OTC. This is the first half of the article, the other one can be found here.
In this article:
Are we in the middle of the liquidity crisis?
What is vesting?
How OTC deals are carried out
What can OTC offer to the crypto market
Why do we need OTC in crypto
A few words about secondary markets
Are we in the middle of the Liquidity crisis?
The cryptocurrency market has changed dramatically in recent months. It is oversaturated, which is not surprising, as dozens of DEX exchanges, hundreds of projects, and thousands of shitcoins invade the crypto space on a regular basis. At the same time, most of the capital and liquidity still revolves around a dozen top exchanges and a couple of dozen coins.
From time to time we observe how 2–3 coins skyrocket pulling over all the liquidity of the market, taking it even from BTC or other fundamental assets. In 2021 that was the case for such cryptos, as ADA or SOL. But in fact, many projects suffer from a lack of liquidity. To sell or buy $ 20–30k worth of crypto from the top 50–100 Coinmarketcap without affecting the price can be a tough challenge.
This is what we call a liquidity crisis. To better understand the solution to this problem and the value of Marsbase, let’s first discuss all the situations in the market which could possibly go wrong.
- Many of the large investors and traders do not have significant trading experience, do not understand the value of OTC, and contribute to the liquidity problem described above by placing large buy/sell orders on centralized (CEX) or decentralized (DEX) exchanges. This provokes price jumps and results in the investors themselves losing their money from such unwary actions.
- At the same time, the exchanges often do not have an intention to promote and consistently support the growth of the trading volume of each and every project they list, especially monitoring that such transactions do not affect the market price. This is because most of the liquidity (about 75%) is concentrated around the top 20 cryptocurrencies that are necessarily traded on these exchanges.
- In addition, many exchanges try or successfully fake their trading volumes in order to attract new traders to invest in hype coins. If an exchange is doing that, it cannot support a big market order of let’s say $100 thousand even if the declared daily trading volume of coin N is approx. $7 million because this would result in the price fall by 2–3 or even 7 %. This means an investor who uses such a platform will receive 7% less than he could in case he’d chosen OTC tools.
On top of that, there is this issue of small-cap projects which do not arouse much interest from the crypto community. Thus, they do not receive much external liquidity unless they have some big news on powerful collaborations and such. It takes millions of dollars and project tokens to draw attention to the project through marketing and pro community management.
In addition, this attention needs to be held which limits the ability of teams to manage the project and maintain real trading volumes. Many projects born in 2020 failed to keep the liquidity for the same reason. It may come from different sources, be it secondary markets, organic growth after public sale, the pump period, etc. The real challenge is still to maintain the level of interest and investments.
Because let’s be honest, early investors often don’t have the ‘buy and hold’ strategy. At some point, they start unloading large volumes of tokens causing a panic sale on the market and toxic community sentiment. Instead of making OTC trades, they make trades in the order book or the liquidity pool. But in fact, what difference does it make to them? These actions lead to a price dump which can be deadly for a young project that probably has not yet had time to launch its product on the market or earn enough credit from its first followers and holders.
To solve this problem many young projects switch to vesting, i.e., investors now get their assets as frozen project tokens which get unlocked over a fixed time.
Now, what is vesting?
Investors receive blocked assets in exchange for their investments in the new projects that have just entered the market (in rare cases these are airdrops, bounty programs, etc.) Projects sell their tokens in fixed parts (allocations) and several stages (tiers). That is done to prevent the token price drop immediately after entering the market. The unlocking of these tokens can take months or even years. While you sit and wait for your assets to get unlocked, the tokens can be already traded on the market and pump 100x times.
Let’s say you are an early investor who participates in a private sale. You invest $250k at an early stage of the project at a very price, for example, at $0.05 per token. The tokens you purchased are frozen and will unfreeze slowly over 9 months. These are vesting tokens. You received them, most likely, by signing a SAFT document. While the market flies up and down, keeps sideways, or lives its best life, the project in which you invested money skyrockets at 10x speed, you’re sitting with frozen assets worth $ 3.5 million.
Now let’s imagine that in the first month, the unlock was about 11%. So, the unlocked tokens are worth around $385k, which is even more than your initial investment. But if you try to sell the part that has already been unlocked, you will face a very strong price slippage up to 10–15%, because the project is young and liquidity is insufficient. In other words, by selling the unlocked tokens, you will lose about $ 50k from the transaction, and the price of your entire purchased volume will decrease by 10–15%, which is already about $ 350–450k.
No matter what you do there is one thing or another: you have assets frozen in vesting, which cannot be returned immediately or you can return the investment by selling the unlocked part while pushing the price to the floor.
What should investors then do? At the moment, there are several options, but all of them are not very convenient: you can transfer the rights to tokens through SAFT documents (token purchase agreement) or, for example, sell the entire account with blocked tokens on the OTC platform via Telegram. But usually, the project management doesn’t want to deal with such schemes.
Back to basics
Time to define what OTC means.
The term OTC (Over-the-Counter) refers to the purchases or sales of assets that are made directly between two parties, and not through exchanges.
Shares or other derivatives which for some reason are not listed on official exchanges are usually traded through the traditional OTC market. The deals are often made done without the presence of traders, but through brokers or over-the-counter offices. The freedom and great opportunities of OTC attract both large and private investors.
How OTC deals are carried out
There are three most frequent scenarios:
- A trader is trusted with assets that he sells through exchanges, depending on the volume.
- An OTC desk takes the responsibility for a large volume of assets and immediately names the price for it conducting a transaction from its balance sheet.
- A large buyer and seller meet on the same site and make a deal at a preferable price above or below the market.
As for the crypto world, OTC trading here was primarily interested in those who are ready to sell large volumes of coins — successful miners and early crypto investors.
What can OTC offer to the crypto market?
There are not so many OTC platforms or managers in the crypto world. And those who exist cannot provide a wide spectrum of coins to choose from. Usually, it’s 8 to 15 currencies max.
In addition, the over-the-counter crypto market is still very young and poorly regulated. There is no common understanding of how to work with this instrument. This is the main reason why so many OTC platforms nowadays are going shady. Their services are marketed via word of mouth, many OTC transactions are undocumented, checks are superficial, and methods are unsafe. What’s worse, even if investors dare to go to the OTC platform, they are often tapping into the various sophisticated forms of fraud. Such an environment is toxic to the market.
For this reason, investors are more likely to use centralized or decentralized exchanges. But there they will face all the problems described above: limited liquidity, strong price changes when making large transactions, etc.
At the same time, few people know about the existence of alternatives. As a rule, market players open CMC, look through offers on several exchanges, compare the Depth parameter — / + 2% and choose the “least of evils”.
Then why do we even need OTC in crypto?
Because it can and should be better. The OTC market is basically a handshake market where experienced people know those who need to buy a LOT or sell a LOT. Usually, these are managers or OTC platforms who quietly conduct deals, while investors get what they want without any influence on the market price. An asset from one pocket is simply transferred to another. Win-win for everyone.
OTC deal volume can easily reach the budget of a small country like El Salvador. In other words, the entry threshold is very high. Plus, over the past 2 years, most transactions have been made during Asian business hours. This could be a sign that major Asian miners such as Bitmain’s Antpool and BTC.com are selling coins through OTC trading. However, the OTC market does not depend solely on miners. Wealthy private investors or hedge funds are also actively involved in trading.
As for the geography of the market, given the recent policy of China regarding cryptocurrencies, the focus of the OTC market is slowly shifting towards North America.
Does this mean that the OTC market has room only for large investors?
It is difficult to say what the starting budget is needed to enter the OTC crypto market. Usually, you need to have a very decent amount. For instance, according to Cointelegraph’s OTC cryptocurrency trading data, the Bittrex platform starts trading from $250,000. However, this applies mainly to those traders who work with institutional investors. For example, in private Telegram chats, you can sometimes find a person who will make a deal with you even for $300,000, but you can imagine the associated risks.
Each OTC desk has its own comfort zone, which can move depending on the state of the market. On Marsbase you can participate in large trades without having large amounts of liquidity. Retail investors can act as bidders in partial trades and contribute to closing the offers with smaller bids.
A few words about secondary markets
A secondary token market is a place where tokens of projects circulate with no additional investments. It means new investments are no longer accumulated, but only redistributed among investors.
As a resale mechanism, the secondary market allows investors to freely buy and sell tokens. In the absence of a secondary market or its weak liquidity, the resale of tokens would be impossible or difficult, which would alienate investors.
Secondary markets begin to form around new projects at the launch stage even before the public sale. For example, when it came to launching Solana, there was huge buzz and amount of liquidity in the secondary markets. There is a lot of OTC work going on both before and after the launch.
Before the launch, some investors find out about a planned large-scale project and want to buy as much as possible at the lowest price. There is often no free trade at this stage yet, so these trades are open only to very large investors.
They can be scattered around the world: Hong Kong, Singapore, Japan, or the United States [First part of the secret code for the Gleam quest: BEST]. If they want to buy a large volume of tokens, say, from $3–5 million dollars they will need to buy everything in parts, for $100k here, another $700k there, etc. It takes the most expensive thing they have, i.e., time, to collect the right amount at the right price, which may have already increased since the start of the project.
After the launch, they also come to the OTC market and say that they have about 2 million unlocked tokens of such and such project, and we want to sell them. Where it leads? That’s right, to the dump. We defined how it happens above.
The people who are trying to get rid of the volume anonymously are most often early investors or team members of this project (that’s right, let’s all admit it). In this case, anonymity is extremely important.
There is an acute question of what to do in the described situations. Despite all the shortcomings of the OTC market, the Marsbase project found a non-standard way out of each of the above situations. Read the second part of this article to learn how can crypto whales or retail investors make money in the OTC market.