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The trades are executed quietly, with billions of dollars worth of crypto changing hands outside the main exchanges. Very little is known about OTC trading, how it works, or its true effect on the market. They are not done through regular exchanges and are therefore not displayed in any public order book, which means increased privacy for both the buyer and the seller.
Some estimates suggest that the volume of crypto traded on OTC markets is two-three times larger than regular exchanges. That would mean Apart from the improved anonymity, another reason to trade in this way is to minimize the impact on the market itself. Trades worth millions or even billions of dollars would inevitably move the price in the opposite direction of your need.
Nowadays, it appears that a large share of the OTC volume comes from only a few hundred massive transactions. Further reading : Who are the Bitcoin Whale? At the moment, there are two different ways to handle OTC transactions: through a middleman or by using big online platforms. OTC brokers, the men in the middle, have their very own network of crypto investors and cryptocurrency sellers.
They constantly keep themselves up to date with who wants to sell or buy coins, how much they want to deal with and when they want to pursue the deal. In the end, they want to match a crypto buyer with a crypto seller and take a commission for the service. Unfortunately, dealing with OTC brokers usually takes a lot of time. Establishing trustful relationships is a key element of conducting business in this way. On an OTC platform, the intermediary will be replaced by a software platform.
Think of it like Coinbase for the uber-rich. In this method, algorithms will match buyers and sellers, and trades will usually be conducted over the platform. Just like with OTC brokers, the platform will take a fee for setting up the deal. The main downside of using a platform instead of a broker would be the omnipresent risk of a hack, as we have seen in the past. Additionally, one should always make sure that the platform is compliant with the current regulations, such as KYC and GDPR, since authorities might crack down on it otherwise.
Crypto Curious? Subscribe to the Block Explorer newsletter to get exclusive crypto insights before they appear on the site. Many crypto people believe that engagement in OTC deals requires them to be a high net-worth individual, or, in other words, a whale.
You might be surprised to know that one of the most popular and oldest OTC markets is actually for the small fishes: LocalBitcoins. The popular platform matches local bitcoin buyers and sellers since and still serves more than four million users worldwide, as recent reports have shown.
As Sapolinski later explained. There were not many questions asked. Easier methods of buying and selling small amounts of bitcoin cropped up, like Coinbase and Binance. Meanwhile, with continuously rising prices of bitcoin, there was suddenly a greater need for larger purchases, larger amounts. The new, vastly wealthy bitcoin whales needed a place to trade. The OTC space changed from quantity to quality.
Fewer clients, bigger transactions. However, with great power comes great responsibility. As explained, the most popular way of conducting large OTC transactions during the past few years was using OTC brokers. According to Sapolinski, bitcoin and other cryptocurrency OTC trades usually follow a traditional discount model. Bob wants to sell a large amount of bitcoin. In order to make such a transaction, Bob will first look for an intermediary, an OTC agent, that he can personally trust.
At the same time, there is a buyer somewhere hoping to find a person willing to sell their precious coins or tokens. She will also provide proof of funds. Both intermediaries will now find each other through their complex black book of contacts. However, there is still an inherent problem with every OTC deal that is done through two different middlemen: the buyers and sellers are often not able to trust each other.
Both parties are expecting the information they need from the other party, which could either be a proof of coin or a proof of funds. The problem is: they will only provide each other with this highly private information if they feel absolutely comfortable in trusting each other.
It is now the time to find a base of trust, which can be pretty hard if you are not able to properly meet. This can usually be achieved by leveraging the network of colleagues that brokers already have a trustful relationship with. Otherwise, trust can also be established through honesty, transparency and the documentation that is provided. Although working with intermediaries has been the crypto OTC method of choice for most of the last decade, it seems like OTC platforms are steadily gaining more influence and power.
This may be due to the fact that large institutional investors would most probably prefer using an OTC platform rather than working with middlemen.
Many financial heavyweights fear the severe trust issues that come with regular cryptocurrency OTC deals. In order to provide a suitable solution for such clientele, many companies started working on fully regulated and secure electronic bitcoin OTC exchanges. Another interesting project is Republic Protocol. Imagine a whale that is sitting on thousands, if not tens of thousands, of bitcoins that he wants to sell.
Due to the incredible amount of bitcoin he wants to sell, he will contact multiple OTC brokers to find him one or more trusted buyers. The word about this deal will slowly spread and some bigger investors might now start to sell their bitcoins in order to participate in that deal and obtain bitcoin at a steep discount.
As you see, OTC deals might have an impact on the price of bitcoin, but they could also be completely excluded from it. Your email address will not be published. This site uses Akismet to reduce spam. Learn how your comment data is processed. Toggle navigation BlockExplorer News. Simon Moser Simon is a very active writer in the cryptocurrency space, where he also helps blockchain companies and startups with their public relations efforts through his PR company PolyGrowth.
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Physics gets weird when things are very large or very small. Financial markets operate in much the same way. For that reason, big cryptocurrency players — hereafter called whales — rely on over-the-counter OTC markets to book their big buys. What whales do under the surface, however, can create very noticeable and notable ripples in the general market. By its nature, the value of different cryptocurrencies can vary widely. A popular exchange like Binance or Kucoin lists individual coins that cost fractions of a cent and coins that cost thousands of dollars apiece. This is the visible market the majority of crypto players are most familiar with.
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Trading outside the popular cryptocurrency venues can be seen as risk management, trying to avoid losing funds in the case of another exchange hacking or any other incident that can take down an established exchange. It can also be a way for whales to avoid making big waves or spooking the market by keeping their trades private.
Why would big players choose to bypass cryptocurrency exchanges learn more here trade in such a way? Tell us what you think in the comments section.
Do you like to research and read about Bitcoin technology? Check out Bitcoin. These days bitcoin and a variety of other digital assets are now being traded as funds and traditional equity holdings. Crypto financial services company Blockfi has launched a trading platform supporting three cryptocurrencies.
The new offering adds to the company's… read. Avi Mizrahi is an economist and entrepreneur who has been covering Bitcoin as a journalist since He has spoken about the promise of cryptocurrency and blockchain technology at numerous financial conferences around the world, from London to Hong-Kong. Share this story:.
Avi Mizrahi Avi Mizrahi is an economist and entrepreneur who has been covering Bitcoin as a journalist since Dec 18, Dec 13, Dec 6,
Inside Bitcoin & Cryptocurrency OTC Desk