What are primary and secondary markets? How to choose the market in crypto investment

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2022-12-03 15:42:41

Key Insights:

  • The primary market is where assets are first created and distributed by the individual/organization that issues the asset.
  • The secondary market is a place where assets are traded between buyers and sellers (excluding asset issuers).
  • Investment in the primary market will bring benefits such as low purchase price, early access, but in return, liquidity risk and high cost (brokerage, access to information, time, etc.) . This form is suitable for institutional investors or professional investors.
  • On the contrary, investing in the secondary market will bring benefits in terms of liquidity, transparent information, standardized products, etc. In return, investors often have to buy at a higher price than primary investors. .
  • In the crypto market, investing right in the primary market will be more optimal in terms of return and risk.

What is primary market?

The primary market is where assets are first created and distributed by the issuer of the asset itself. Accordingly, buyers of assets in the primary market will buy directly from the issuer.

For example, for assets that are stocks, the primary market is where buyers (usually investment funds, banks, individuals with large net assets, etc.) buy shares directly from the company. . The following are the benefits that the parties receive:

  • For companies: Get money from investors to develop, in exchange for losing part of the ownership.
  • For investors: Get partial ownership of the company at a cheaper price (compared to the secondary market), in return for higher intermediary costs and liquidity risk.
  • For intermediaries: Receive a commission for the promotion of the sale between the parties.

Typically, products on the primary market are subject to fewer regulatory requirements than on the secondary market. Therefore, they will have a higher level of risk and require a large amount of initial capital.

What is secondary market?

The secondary market is where assets are traded between investors after the assets have been initially issued in the primary market.

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

Also with assets that are stocks, the secondary market is a stock exchange where buyers and sellers (not the company that issued the shares) meet to trade. Prices are determined by market supply and demand.

Since the buyers of shares on the secondary market buy from others, the money does not flow directly into the business.

Compared with the primary market, the secondary market has the following differences:

  • Greater liquidity due to mass accessibility.
  • The intermediaries costs are also lower due to the standardized product and transaction system.
  • Lower level of risk.

How do primary and secondary markets interact?

The primary market is where the assets are first formed, so this is the basis for the formation of the secondary market.

secondary market

So why is the primary market usually reserved for professional investors? Are individual investors more disadvantaged by having to buy assets at higher prices on the secondary market?

Take for example with assets that are stocks. When the shares are not listed on the exchange, owning them will be very difficult, because investors have to contact the company directly, set up the records and papers and bear the related constraints to ensure a successful transaction.

This process takes a lot of time and effort. Besides, finding companies to invest in also requires a lot of in-depth knowledge to be able to generate profits. In addition, in this case, investors will still face liquidity risk if the company they invest in is not listed on the stock exchange (where there is high liquidity to be able to “exit” easily).

On the contrary, for stocks, buying/selling, finding information about them on the secondary market is very easy. Therefore, investors in this market will face less risk.

Therefore, the existence of the two markets is intended to distinguish between professional and non-professional investors, as well as to divide risks based on their positions.

The primary market can also be viewed as a “filter” so that suitable investment products can be made accessible to the masses. On the other hand, because amateur investors account for a large percentage of the market, having the above “filter” will help smooth cash flow and promote the development of the financial system.

Market selection in crypto investment

Primary and secondary markets in crypto

Similar to the above definitions, the primary market in crypto can be understood as when we buy tokens in Seed, Private, Series A, Series B… or when we buy tokens in IDO/ ICO/IEO/…

Although there is still a difference in the purchase price between the above rounds, the common point is that these tokens have not been listed and traded on any exchange. Besides, the amount of tokens we buy is bought directly (or almost directly) from the issuing project.

For crypto, a secondary market occurs when a token is listed on an exchange (CEX or DEX).

However, with the advent of DEX and decentralized listing mechanism, the difference between primary and secondary market in crypto is not as clear as in traditional finance (because the project is complete. It is possible to list tokens directly on the DEX and provide initial liquidity for tokens).

The choice of the market affects the investment position

Because in crypto the difference between the two markets is not so clear, so when investing in crypto, for small individual investors, the optimal way of risk/return is to find opportunities to invest in the primary market. level (usually through IDO/IEO/ICO or project whitelist activities).

ico ido performance
IEO investments all give ROI at very impressive ATH price

The reason why small investors when investing in primary tokens will not need to worry too much about liquidity (which is a big risk for this market), because when listing tokens, usually projects will provide a certain amount of liquidity for them (unlike stocks, if they are not listed on the stock exchange, the project will have to find a buyer, which is very time consuming and expensive).

However, if we buy tokens of unscrupulous projects, even scams, we will have to suffer consequences such as:

  • The project “hugging money” ran away, not listing or adding liquidity for tokens on the DEX.
  • Offers only a very small amount of liquidity on the exchange.
  • The project’s products are only made for “for having”, not bringing benefits to the buyer. The activities of providing liquidity or listing tokens are secondary while “collecting money” is the main purpose.
  • And there are many other possible scenarios.

Therefore, not every time we can buy tokens at a low price, we will always make a profit. There are many inherent risks in the crypto market that require each individual to have a way to check the quality of each project before making an investment decision.

Epilogue

In the investment process, the choice of primary or secondary market greatly affects the risk and return of the investment. Besides, the investment in either of these two markets also depends a lot on the capacity of the investor.

Specifically in the crypto market, because access to the primary market is quite easy, choosing to buy tokens directly from the project will be a solution to optimize risks / profits for investors.

In addition, for small individual investors, token liquidity will not be too much of an issue (because when listing tokens on a DEX, the project will often provide a certain amount of liquidity), so buy at Primary market will be more optimal than buying in the secondary market.

However, for crypto, when investing in the primary market, we also need to check the reputation of the project to avoid cases of buying fraudulent tokens.

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