What is over-the-counter cryptocurrency trading and what benefits does it offer to traders?
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. Liquidity in that market is restricted by the number of individuals participating in the market at any one time. Moreover, if that big buyer announces the intention to buy all the jade trinkets currently available, the price of those trinkets is going to skyrocket. If that same player arrives with a bag of trinkets and announces the intention to dump them all as soon as possible, the price will drop.
Unlike traditional exchanges, the OTC market is decentralized and has no physical location, and trading is done via dealer networks. What is otc bitcoin trading are not necessarily involved in the process directly, as they can seek assistance of middlemen, like brokers, or OTC desks.
OTC desks are mostly trading securities that are unlisted on a formal exchange due to various reasons. Often, smaller companies are unable to comply with the listing requirements of formal exchanges or pay the fees required by the big industry players.
This market brings not only the risks that counterparties face during the direct deal, but also freedom and opportunities, which is why OTC trading has become increasingly popular among qualified investors, traders and even commercial giants. With regard to the cryptocurrency industry, OTC desks have gained popularity among those who are willing to sell large amounts of coins, like miners or early crypto investors.
The OTC market is considered particularly promising by crypto investors. Perhaps this is why major companies such as Binance, Coinbase and Circle kept opening their own OTC desks right in the midst of the crypto winter, when the rates of bitcoin and major altcoins were far from optimistic. According to some estimates, crypto OTC trading currently has larger daily volumes than the major exchanges. Crypto miners who sell their profits represent a significant segment of OTC market sellers, while hedge funds and institutional investors are among the buyers.
However, the OTC market is obviously far from being dependant on miners. According to an investigation performed by Reuters, this type of trading also involves wealthy investors, payment processors and, increasingly, hedge funds. As perthe notable players on this market were men in their mids or early 30s. The trades were more info performed via online messaging services like Telegram or Skype, through brokers or on specialized OTC desks.
Incidentally, some experts believe that institutional investors, who are expected to drive crypto industry to mass adoption, are widely interested in buying crypto outside large exchanges. To sum up, everyone who wants to buy or sell large amounts of crypto without excessive regulation and sometimes on better terms applies to OTC trading or intermediaries working in the sphere. If you are seeking higher liquidity, combined with a decent level of anonymity, OTC trading might be an elegant solution for you.
Most importantly, you would be seeking high liquidity for your assets. The experts agree that major exchanges usually have lower liquidity than what is ideal. This is why you might rather use OTC trading if you are looking to invest. The second key goal for a trader is to minimize the impact on the market as a consequence of a large deal.
This point is relevant mostly for those who are looking to buy or sell thousands of bitcoins. If you apply to OTC trading, the transaction is performed directly and does not show up in order books, which is why it will not affect the price. Moreover, if you are investing in a lot of bitcoin or any other crypto asset, you might want to protect your identity and keep the deal anonymous.
In this case, skipping the services of major exchanges and purchasing the assets directly from a counterparty is a nice way to avoid unnecessary attention and keep the deal to. Finally, even if you are quite far from being a bitcoin whale, on regular exchanges, you have to respect certain daily and monthly trading limits. Http://trackmyurl.biz/what-are-tokens-in-bitcoin-651.html institutional OTC desks launched by crypto giants name an impressive starting sum, but smaller companies and intermediaries have lower thresholds.
Normally, the amounts are quite impressive. As Cointelegraph briefly explained in its review dedicated to OTC services in crypto, on the desk founded by the U. Another U. Meanwhile, on the U. However, the atmosphere of OTC trading in smaller companies and in specialized private chat rooms is much more relaxed.
And in some Telegram chats, you can set a deal directly with a person who needs the same amount of crypto you want to sell. For a higher level of anonymity, choose smaller companies or what is otc bitcoin trading deals. To start trading, you first of all have to decide whether you are ready to comply with KYC procedures and provide your sensitive private data to the intermediary.
As we explained before, on the desks operated by Coinbase, Binance what is otc bitcoin trading other major exchanges, you will likely be obliged to do so. The process of becoming an OTC deal participant at smaller services is much more simple. For instance, at Changelly, the customer only needs to provide a working email, a convenient messenger for further communication with a broker assistant, and to provide a username via the application form placed on the OTC online desk.
Moreover, if you are working with broker assistants or other counterparties, you have to carefully examine the fees charged for each transaction.
For instance, it might be flat or, on the contrary, might vary based on the size of the trade. Security and the type of what is otc bitcoin trading that the OTC desk uses are also important. It is crucial to find out whether your service is providing insurance to traders or not.
It would also be useful to have a personalized assistant available in your time zone, who could answer your questions and help with the deal in case of any troubles. Finally, do not forget to check reviews on what is otc bitcoin trading sources.
If you are working with the assistant, it is crucial to find out how long he or she has been in business. You can also Google whether he or she specializes solely on OTC trading or also offers other services. As well as in any other type of trading, you should be worried about scammers and settlement risks.
The sources what is otc bitcoin trading the large crypto amounts can sometimes be quite murky. As an anonymous trader told Reuters, OTC trading sees spikes of activity when a big hack happens. So, when you trade anonymously, you always have to be careful with the trader on the other side and beware of suspicious transactions.
The forums and topics on Reddit are full of sad stories about scammers taking advantage of naive traders, providing fake videos of the amounts they have, making false agreements or using other phishing techniques.
In particular, there are many warnings about fraudsters on LocalBitcoins. However, in most cases, fraud can be prevented by simply canceling any deal that seems shady or by applying to a skillful intermediary. Moreover, most OTC brokers do not yet provide a trusted custody solution, which would mitigate settlement and operational risk. It is for this reason that many traders use escrow services or bank transactions to be able to return the money if the deal fails.
As the OTC market evolves, companies are working on building trusted custodial solutions and risk management systems. What is otc bitcoin trading OTC market is expected to continue steadily growingand the financial insiders are exploring new ways to make these deals more secure so that institutional investors might be more involved in crypto. Meanwhile, Coinbase has integrated its custody service with its own OTC desk, which enables customers to use the OTC desk to price and confirm trades prior to moving funds.
Cointelegraph does not endorse any content or product on this page. While we aim at providing you all important information that we could obtain, readers should what is otc bitcoin trading their own research before taking any actions related to the company and carry full responsibility for their decisions, nor this article can be considered as an investment advice.
Analysis Opinion In Depth. Use Case Expert Take Interview. Top 10 Cryptocurrencies Markets Market Analysis. Explained People Bitcoin DApplist Events Press Releases. Elijah Bradley. JUN 03, What is OTC trading? Who are the main customers of crypto OTC desks? I'm not a bitcoin whale. Why would I use OTC trading instead of a crypto exchange? What amount of crypto do I need to start OTC trading? Okay, I want to start trading. How do I choose an OTC desk?
What are the problems cryptocurrency and foreign exchange OTC? How are these issues solved? Learn more about Changelly.
OTC for Whales, Exchanges for Everyone Else
Bob wants to sell a large amount of bitcoin. The main risk of OTC trading involves settlement. There are several reasons whqt large-volume traders might consider going OTC:. Sign in. Finder, or the author, may have holdings in the cryptocurrencies discussed. It is not intended as and does not constitute investment advice, and is not an offer to buy or sell or a solicitation tradint an offer to buy or sell any cryptocurrency, security, product, service or investment. Keep changing the times when you call to execute the trade. Given volatility in the markets in recent times, this is easier said than .