Heard people talking about primary and secondary markets and don’t really understand what they are? In this blog we will simply define and explain them.
A Simple Explanation Of Primary And Secondary Markets
Every blockchain has its own cryptocurrency which must be bought or acquired to use it. A primary market is one where the coins of that cryptocurrency are initially issued straight to the user. A secondary market is one where those coins or tokens can be exchanged for other cryptocurrencies or sometimes fiat money.
What Is A Primary Market?
Cryptocurrencies can be coined in a number of different ways. Bitcoin, the world’s first cryptocurrency, issues new tokens to “miners” who undertake the consensus mechanism required to verify all new transactions on its blockchain. This consensus mechanism is called Proof of Work and requires miners to solve complex mathematical problems requiring a lot of computing power. As a reward, they are issued with newly created Bitcoins. There are many other cryptocurrencies which use Proof of Work and reward miners in this way. Alternatively, Ethereum mints tokens for use on its platform which was built as a transactional blockchain that operates via the execution of smart contracts. Projects on the platform can mint new tokens on top of the blockchain enabling on-top applications. These tokens fall into three different categories:
Payment tokens – pure cryptocurrency with no further function other than to use in exchange for services.
Utility tokens – enable digital access to an application or goods and services of a project, a bit like a token at the fair.
Security tokens – represent securities in that project, entitling the holder to dividends or interest payments, similar to shares in a company.
More About Tokens
Companies use tokens to raise capital for a project. In the case of payment and utility tokens, this is known as an ICO (Initial Coin Offering). In the case of security tokens, it is known as an STO (Security Token Offering). Compared with a traditional Initial Public Offering, security tokens on the blockchain have a number of distinct advantages:
- Tokens are transferable immediately from issue and may be traded at any time on secondary markets.
- Clearing and settlement takes no more than a few minutes.
- Tokens may be held personally without the need for brokers or custody accounts.
- The blockchain ensures the transparency and immutability of all transactions.
There exists yet another way to acquire tokens from a primary market and that is via airdrops. This is when cryptocurrency coins or tokens are distributed to numerous wallets, usually for free. It is normally done as a marketing pitch to promote awareness of a new cryptocurrency.
What Is A Secondary Market?
Secondary markets in the crypto world operate in a similar way to OTC (over the counter) trading. They are exchanges that facilitate the trading and exchanging of cryptocurrencies and they can be divided into two categories – centralized and decentralized.
Centralized – centralized servers that are very efficient but carry a single point of failure. They normally offer users the additional benefit of converting their cryptocurrencies into fiat currencies such as USD or EUR.
Decentralized – also known as a DEX (decentralized exchange), trades are executed solely on the blockchain without a third party. Users can connect directly, with all the benefits of blockchain technology including greater security and anonymity. A DEX won’t usually trade in fiat currency and is not as efficient as a centralized exchange.
Nfts In The Marketplace
Primary and secondary markets don’t just deal with cryptocurrencies. You may be faced with a choice of using a primary or secondary market when considering the purchase of an NFT. Let’s say you are an art lover interested in purchasing generative art which uses logarithms to generate unique aspects to a piece, independent of the artist. Buying an NFT from a new generative art collection can be done via a primary or secondary market.
Primary market – you deal directly with the artist and on most occasions, what you pay for an NFT when it is minted is the cheapest time to buy. But its price may still fall and by design, you won’t know exactly what you’re getting until you’ve paid for it. It’s a bit like a lucky dip!
Secondary market – you’ll probably have to pay a premium but you’ll get exactly what you want. There is greater security and less chance of being scammed when buying from an established project via a reputable exchange.
Want To Know More About How Primary And Secondary Markets?
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