What are Primary and Secondary Markets? How to Choose the Market in Crypto Investing

What are Primary and Secondary Markets? How to Choose the Market in Crypto Investing

In investing, deciding between primary and secondary markets greatly impacts the position, expected profits, and risks of the portfolio. What are primary and secondary markets? Let’s explore in the following article.

Key Insights:

• The primary market is where assets are created and distributed for the first time by the issuer.
• The secondary market is where asset transactions take place between buyers and sellers (excluding the asset issuer).
• Investing in the primary market offers benefits like lower purchase prices, early access but comes with higher risks in liquidity and costs (brokerage, information access, time, etc.). This form is suitable for institutional investors or professional investors.
• Conversely, investing in the secondary market offers benefits in liquidity, transparent information, standardized products… However, investors usually have to buy at a higher price than in the primary market.
• In the crypto market, investing directly in the primary market optimizes profits and risks.

I. What is the primary market?

The primary market is where assets are created and distributed for the first time by the asset issuer. Buyers in the primary market purchase directly from the issuer.

For example, with stocks, the primary market is where buyers (usually investment funds, banks, high-net-worth individuals…) buy shares directly from the company. Here are the benefits for each party:

• For the company: Receives funds from investors for development, in exchange for losing some ownership rights.
• For the investor: Gains ownership in the company at a lower price (compared to the secondary market), in exchange for higher intermediary costs and liquidity risks.

For intermediaries: Earns a commission fee for facilitating the transaction.

• Typically, products in the primary market are subject to fewer legal requirements than the secondary market, hence carry higher risks and require larger initial capital.

II. What is the secondary market?

The secondary market is where asset transactions occur among investors after the asset has been initially issued in the primary market.

In the secondary market, products are highly standardized and subject to many legal regulations to meet the trading needs of the public.

For instance, with stocks, the secondary market is the stock exchange where buyers and sellers (not the issuing company) meet to trade. Prices are determined by market supply and demand.

As buyers in the secondary market purchase from others, this money does not flow directly into the company.

Compared to the primary market, the secondary market differs in:

• Higher liquidity due to accessibility to a larger audience.
• Lower intermediary costs due to standardized products and trading systems.
• Lower risk levels.

III. How do primary and secondary markets interact?

The primary market is where assets are first formed, thus forming the basis of the secondary market.

Why is the primary market usually for professional investors? Are individual investors at a disadvantage when they have to buy assets at a higher price in the secondary market?

Take stocks as an example. When stocks are not yet listed on an exchange, owning them is difficult, as investors must directly contact the company, establish paperwork, and adhere to related constraints to ensure a successful deal.

This process is time-consuming and labor-intensive. Besides, finding companies to invest in requires extensive knowledge to be profitable. Also, in this case, investors face liquidity risks if the company they invest in is not listed on a stock exchange (which has high liquidity for easy exits).

Conversely, for stocks, buying/selling and finding information about them in the secondary market is very easy. Therefore, investors in this market face fewer risks.

Thus, the existence of these two markets serves to distinguish between professional and non-professional investors and to divide risks based on their position.

Primary and Secondary Markets in Crypto

Similarly, the primary market in crypto can be understood as when we can buy tokens in Seed, Private, Series A, Series B rounds… or in IDO/ICO/IEO/… events.

Although there is a difference in the purchase price between these rounds, the common point is that these tokens are not yet listed or traded on any exchange. Also, the tokens we buy are directly (or almost directly) from the issuing project.

In crypto, the secondary market emerges when the token is listed on an exchange (CEX or DEX).

However, with the advent of DEX and decentralized listing mechanisms, the difference between primary and secondary markets in crypto is not as clear as in traditional finance (since projects can directly list tokens on DEX and provide initial liquidity for tokens).

IV. Choosing the market impacts investment positioning

n crypto, since the distinction between the two markets is not very clear, for small individual investors in crypto, the optimal way to balance risk/reward is to seek opportunities to invest in the primary market (usually through IDO/IEO/ICO or project whitelist activities).

The reason small investors do not have to worry much about liquidity issues (a major risk in this market) is that when listing tokens, projects usually provide a certain amount of liquidity for them (unlike stocks, which are time-consuming and costly to find buyers if not listed on a stock exchange).

However, if we buy tokens from disreputable or even fraudulent projects, we may face consequences like:

• The project absconds with the money, not listing or adding liquidity for the token on DEX.
• Only providing a very small amount of liquidity on the exchange.

The project’s product is made just for show, not benefiting the buyer. Activities like liquidity provision or token listing are secondary to the main goal of collecting money.

And many other scenarios may occur.

• Therefore, just because we buy tokens at a low price does not always mean we will reap profits. There are many inherent risks in the crypto market that require each individual to check the quality of each project before making an investment decision.