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How Does OTC Crypto Trading Actually Work?

Over-the-counter (OTC) markets saw a massive uptick in cryptocurrency trading volume in the past year as brokers are competing to get institutional money that started entering into crypto markets. The OTC Bitcoin market generally operates in the same way the global financial OTC markets do. In fact, established crypto exchanges have also launched their own OTC trading desks to capitalize on increasing demand both from retail and institutional investors.

According to a recent Capco report, North America and Asia are the leaders when it comes to OTC crypto trading volume, with market participants include major hedge funds, family offices, broker-dealers, cryptocurrency miners, investment funds, high-net-worth individuals, and private banking institutions.

At the end of 2020, one of the largest over-the-counter digital asset platforms Genesis Global Trading reported a 50% growth in its trading volume from the past year period. The OTC trading platform also claimed that crypto loans to institutional clients reached a $1 billion mark in less than a year of launching its lending arm.

A Brief Look at Over-the-Counter Markets

All trades conducted directly between two parties without the intervention of exchange is known as over-the-counter (OTC) trading. In many ways, it is different from trading through established and regulated exchanges.

To trade on exchanges, assets must match the minimum requirements in order to create transparency in trading. Meanwhile, limitations in the OTC market are not strict; traders can settle on the price and quantity based on their requirements. Traders create a bilateral contract on OTC markets.

What is Crypto OTC?

Investors have been benefiting from off-exchange crypto trading since 2014 when Circle first launched crypto OTC trading to support the financial needs of bitcoin miners.

Trading cryptos on over-the-counter markets is no different from trading stocks or other assets. Investors are required to enter into a bilateral contract, meaning that the deal would be done directly between two parties.

Institutional investors, hedge funds, professional high-volume traders, and family offices are usually the main players in OTC markets. These buyers normally have a large capital base with the potential to trade a minimum of $25,000-$75,000 worth of assets – a limit usually set by OTC brokers. Miners are also among the major sellers on OTC markets.

“Institutional investors, therefore, prefer the discretion, professionalism, and best-price execution provided by OTC trading desks. Additionally, there are no exchange limits affecting order size when trading with professional counterparties over-the-counter,” Genesis Global said.

Last year, billions of dollars in crypto transactions occurred through OTC markets. Investors are also not required to stick to a particular form of money. One can trade crypto-to-fiat or crypto to crypto transaction.

Advantages of Trading Through OTC Markets

Liquidity: Liquidity is the key factor when it comes to trading through over-the-counter markets. Crypto exchanges typically have low liquidity. Buying cryptocurrencies through OTC markets reduces the risk of price slippage because OTC desks offer opportunities to buy a large amount of crypto. On the other hand, crypto exchanges often struggle in executing a large order effectively so they break that order into small pieces. As a result, it is difficult for buyers to buy a large number of cryptocurrencies at a specified price.

Anonymity: OTC desks offer better anonymity. One can secretly buy a large number of crypto coins without creating a meaningful impact on the price.

Direct Transactions: OTC desks empower buyers and sellers to make direct trades, without any restrictions that exchanges currently impose.

Less-Known Cryptocurrencies: Exchanges normally permit investors to buy or sell popular cryptocurrencies. However, investors can buy a large quantity of less known crypto coins via OTC markets that are not widely available on exchanges.

How does an OTC trade work?

The investors need to reach out to the OTC broker to make trades. The broker will then find a counterparty that qualifies your requirements. Once the broker finds both buyer and seller, the broker will stay on the sidelines and let the buyer and seller negotiate over the quantity and price of the transaction. Once the buyer and seller settle on the price and quantity, they need to transfer the money and custody of assets via a broker.

Who are the OTC brokers?

Before the 2017 bitcoin bull run, there were only a few OTC crypto brokers. However, the trend has gained momentum recently, with several well-known crypto exchanges launching their own OTC platforms. These exchanges include Coinbase, Binance, Bittrex, Bithumb, and Poloniex.

Conclusion

The rise of institutional investors’ interest in crypto markets is the major reason behind the growth in over-the-counter trading platforms. New research suggests that OTC platforms saw 2X and 3X growth in their trading volume last year, thanks to a stronger crypto adoption rate. Institutions surveyed for this article said higher liquidity is among the main reasons behind investors’ moves towards over-the-counter platforms.