Cryptocurrency funds and market makers purchase tokens at a significant discount through private over-the-counter (OTC) trading and hedge through short selling, achieving double-digit annualized returns, while the risks are borne by retail investors.

Enflux co-founder Jelle Buth stated that venture capital firms, funds, and market makers typically receive allocations at about 70% of the price, with a lock-up period of three to four months, and then short an equivalent amount of tokens in the perpetual contract market for hedging.

This structure essentially guarantees profits, with annualized returns reaching as high as 60% to 120%, regardless of token price fluctuations.

Buth mentioned that Enflux also participates in such trades and pointed out that this is the mainstream method for project parties to raise funds and for investors to lock in profits. Retail investors, excluded from these arrangements, become the primary bearers of the burden when hedging and unlocking selling pressure occur.

According to Cointelegraph, Buth stated, "I no longer want to be a retail investor."

Buth noted that OTC trading is inherently disadvantageous to retail investors, not only due to selling pressure affecting token prices but also because ordinary investors lack transparency, making it difficult to make rational judgments.

Here is a typical OTC trade process:

A certain institutional investor participates in a $10 million fundraising with a $500,000 allocation.

They purchase tokens at a 30% discount, with a lock-up period of four months.

To hedge against price fluctuations, the investor opens an equivalent short perpetual contract in the futures market.

Price fluctuations are offset, and the built-in discount locks in their profits once the tokens are unlocked.

Since a 30% return is achieved within four months, the annualized return rate reaches 90%.

In traditional finance, companies must disclose fundraising matters through regulatory documents. If insiders or institutional investors receive discounted allocations, it is usually reflected in public documents.

Yuriy Brisov, a partner at Digital and Simulated Partners Law Firm, stated in an interview with Cointelegraph, "Hedge funds have long bought convertible bonds at a discount and neutralized risk by shorting the underlying stock. This practice is not illegal, but it is subject to strict information disclosure and trading restrictions in the stock market."

In the crypto industry, project parties do not always disclose specific terms. Announcements often only mention project fundraising of X million dollars without indicating that the allocated tokens come with discounts and short lock-up periods.

Douglas Colkitt, a founding contributor of Layer1 blockchain Fogo, stated in an interview with Cointelegraph, "Discounted OTC allocations are almost an open secret in the crypto industry."

On the surface, OTC discounts combined with hedging seem like risk-free trades. However, in reality, perpetual futures can also be disadvantageous to investors.

Unlike traditional futures contracts, perpetual contracts have no expiration date. Traders holding perpetual contracts must pay or receive funding rates. When the price of the perpetual contract is higher than the spot price, shorts must pay fees to longs, which can continuously erode the profit margin of discounted tokens.

Brian Huang, founder of the crypto management platform Glider, stated in an interview with Cointelegraph, "Additionally, there is an opportunity cost because these funds could have been used for other investments during the lock-up period."

Jelle Buth stated that negative funding rates are the biggest risk faced in OTC trading.

Despite being disadvantageous to retail investors, OTC token trading remains prevalent because it meets the core needs of both parties involved in the trade.

For project parties, private token sales can quickly raise millions without the volatility caused by directly selling tokens in the market. This provides funding support for product development, marketing, or buybacks to maintain token prices after unlocking.

For funds and market makers, they can invest funds in tokens to achieve predictable returns without being locked into high-risk seed rounds or equity rounds.

Hedging through perpetual contracts can reduce market volatility risk, and the embedded discount ensures profit margins, as long as the funding rates do not significantly erode returns.

Buth stated, "Many VCs no longer even focus on seed rounds—they prefer highly liquid trades or tokens from mature projects that can be traded immediately. If the lock-up period for trades lasts 12 or 24 months, it becomes very difficult to complete such financing because the lock-up time is too long, and returns are hard to meet the investors' expected annualized return of 60%-80%."

Ultimately, the reason OTC trading continues to exist is that it aligns the interests of the most financially powerful and influential participants in the crypto industry. Project parties gain immediate liquidity, funds achieve high-yield trades, while retail investors often can only passively respond to price fluctuations, struggling to understand the trading terms that determine prices.

The fundamental goal of a business is profit. Buth stated that he does not blame project parties for providing OTC opportunities or blame funds for participating. Enflux, like other market makers, is simply "playing the game." He suggests that retail investors should understand their trading counterparts, as these trades lack the transparency of mature industries.

Colkitt believes that this impact is more profound. He stated that OTC hedging and discounted allocations distort token prices, creating the appearance of insufficient demand due to selling pressure.

"The market is not actually denying the project itself. Ultimately, the problem lies in these trading mechanisms," he said.

Meanwhile, such trades are increasingly appearing on fundraising platforms that allow retail participation. Huang stated that the industry should expect these platforms to expand further.

Huang holds a different view, believing that transparency is not the core issue. "The essence of these trades is to allow tokens to circulate without significantly impacting prices," he stated. He suggests that startup projects should prevent VCs from selling tokens in the secondary market.

Currently, this imbalance still exists, with OTC token trading continuing to provide predictable returns for project parties and funds, while retail investors remain at a passive disadvantage, participating in a game they never agreed to.

The most important thing for retail investors is to recognize this asymmetry, fully consider hidden selling pressure, and adjust their trading strategies.

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