(Bloomberg) -- Cryptocurrency investors are locking in returns from digital assets they’re ostensibly barred from selling by entering into complex arrangements with specialist trading firms.

Venture-capital companies and other investors sitting on tokens that cannot yet be traded on the open market are working with market making firms to hedge their positions, according to seven people familiar with the matter, some of whom declined to be named because the arrangements are confidential.

The total value of all digital assets in circulation roughly doubled in 2024, according to CoinGecko data, yet the industry’s venture investors have struggled to produce tangible returns. A recent dip in token prices – Bitcoin is currently trading more than 25% below a $109,241 record set in January – suggests investors may have a vanishing window in which to realize gains.

Trading firms are stepping in to ease the pressure by “constructing two-sided books on these tokens that exist outside of the centralized exchanges,” said FalconX Global Co-Head of Markets Joshua Lim.

Wintermute, Flowdesk and Caladan are among the market makers taking the other side of such trades, according to spokespeople for those companies. GSR and Nomura Holdings Inc.’s Laser Digital are also active in the space, according to people familiar with the matter. Laser and GSR declined to comment.

“Since mid-2023, we’ve witnessed a rapidly developing secondary market for locked tokens,” said Flowdesk Chief Markets Officer David Bachelier. “While it’s not yet a fully functional two-way market for various reasons, the demand suggests significant potential for innovation and growth.”

Token Troves

Early backers of crypto projects are often given tokens as well as — or instead of — shares. The tokens are typically subject to vesting programs, meaning they’re unlocked according to a schedule that can last years. As a result, they can’t be sold on the open market in the meantime.

The five largest unlocks of 2024 brought more than $5.4 billion worth of tokens into circulation, according to a report from Tokenomist.

Unlocks can ramp up selling pressure as holders rush to book profits, which in turn can weigh on token prices. To hedge against that risk, token holders are turning to market makers and other funds for help.

“We have noticed more interest in token investors — not just VCs, but foundations, individual investors, etc. — for hedging in general,” said Wintermute’s Global Head of Business Development and Partnerships Jonathan Chan.

There are several ways to do it. One involves reassigning the assets to a buyer at a discount through the transfer of a contract known as a Safe Agreement for Future Tokens. A so-called tri-party custodian is often engaged in this scenario to look after the assets.

Another method involves a forward contract, which is a bilateral agreement between two parties to exchange tokens for a predetermined price once they unlock — in essence a kind of derivative. The seller typically puts up collateral in these arrangements to ensure the tokens are sent on the agreed date, which “helps to mitigate the risk of the seller not delivering the assets if the price of the token drastically appreciates,” Wintermute’s Chan said.

There are also websites, such as OFFX, that broker over-the-counter and secondary market trades in locked digital assets. OFFX didn’t respond to a request for comment on its activities.

In many cases, hedging of this kind – specifically the transfer of token rights – requires approval from the crypto project that issued the tokens in the first place. But there are also ways to hedge locked tokens without permission, according to two of the people familiar with the matter.

That’s made locked token hedging a sensitive topic in crypto circles.

Still, Will Leung, head of partnerships at Caladan, sees such trades as a vital tool for funds sitting on large piles of locked tokens.

“I think managing the risk around your balance sheet is very important,” he said. “We’re not advocating for people to essentially not honor their investment agreements.”