What is Crypto OTC Trading and How Does it Work?
For several years since bitcoin made its appearance in 2009, transactions with crypto were carried on the OTC market only, even before classical exchanges arouse. OTC environments that allow lump transactions emerged in 2013-2014.
Now, cryptocurrency can be traded on p2p platforms where users buy small amounts of crypto, plus on sites for purchasing large amounts of digital currency. Today, we talk about OTC in crypto, its features and functioning, differences with exchanges, pros and cons, other aspects. Join our discussion!
Crypto OTC Desk
OTC for digital currency is a mechanism that came from the traditional securities market and stands for over-the-counter. This term popped up in the late 19th century and referred to the practice of trading shares at bank counters or on streets near stock exchanges.
Over-the counter transactions are usually not reflected on the market, for they are concluded directly between a seller and buyer, bypassing exchanges. Thus, large money settlements do not manipulate the cost of the assets involved in an arrangement.
How Does Cryptocurrency OTC Trading Work?
OTC settlements are a complex procedure comprised of verification, negotiation, and transfer stages. Let’s discover what peculiarities it has.
Step 1: Know your client
An outstanding OTC platform is not merely a medium, as with p2p domains, where users purchase small doles of cryptocurrency from each other. A licensed provider is liable to its customers and conducts KYC checks to verify counterparties for compliance with the rules of anti-laundering legislation.
Step 2: Negotiate price
An over-the-counter procedure itself begins with an online request and a further search for a counterparty. When such a partner is found, they inform about their preferred volume and price, which may be 1-5% higher than the market rate. Then, it the seller’s turn whether they agree, cancel or negotiate this deal.
Step 3: Money transfer
When both parties reach an agreement as to the size and price of this arrangement, they can exchange their assets. Usually, they send money directly to electronic wallets. Another option is to make a bank transfer.
Types of Crypto OTC Desks
Cryptocurrency over-the-counter desks are divided into Principal and Agency ones that differ in the risking party. With Principal desks, it is an OTC platform that carries risks trading with its own money on behalf of a client. Agency OTC services, on the contrary, act as an intermediary that buys assets for client’s money.
In both scenarios, there is a probability that services may fail to find a counterparty before asset prices jump. Principal OTC desks lose profit in this case as their goal is to secure a cost lower than the market, whilst Agency OTC traders stop searching until a client updates their agreement.
OTC Crypto Exchange vs. Traditional Crypto Exchange
The main difference between over-the-counter crypto exchange and traditional crypto exchanges is unique terms. On exchanges, prices are determined by supply and demand, whereas OTC desks allow its participants to negotiate any volume and price, sometimes with a significant discount or surcharge to the stock price.
Furthermore, exchange traders have to make many small transactions to trade a big sum, which, in turn, triggers rates. At that time, it is liquidity, volatility, and spread that determine the number of required transfers. Therefrom, price fluctuations ultimately upscale trading rates and cripple participants.
That said, in OTC trading, clients have one large transaction that can nonetheless be divided into smaller portions. The stipulated initial price, however, remains, which helps traders to increase efficiency and escape price slippage.
Why Trade Crypto via OTC Trading Platform?
A general challenge with almost any cryptocurrency asset is that it has insufficient liquidity. Besides. almost any massive transaction can greatly impact exchange rates. Over-the-counter combats this setback and guarantees a few other advantages:
- Greater transactions. OTC platforms enable enough liquidity to work with large amounts;
- Saved money. Most services do not charge commissions;
- Maintained confidentiality. Some OTC domains provide anonymous transactions, without entering data into registers;
- Price stability. The negotiated price has no impact over currency rates and stays the same until a deal ends;
- Functional independence. OTC platforms operate at weekends and in periods of high volatility.
In the crypto sphere, the OTC market has long been the environment for the whales, whose deals start at $50,000-100,000. Now, anyone can benefit in OTC deals with just $3,000 by purchasing a part of a huge lot with a lucrative discount, due to emerging DeFi OTC desks.
What Risks Does Crypto OTC Trading Have
OTC domains managing big money are an attractive tool for giant investors. We are witnessing the formation and growth of a private cryptocurrency banking, which will become an alternative for clients who want to diversify their investments. Yet, there are a few drawbacks to consider:
- High risk. White destinations neutralise the chance of fraudsters joining over-the-counter trading through thorough KYC and AML. Meanwhile, the members of the grey segment stay at risk;
- Few currencies. OTC sites run with a modest range of crypto, which, nevertheless, incorporates major ones, bitcoin, ether, litecoin;
- Information leakage. Even though OTC deals do not affect price directly, insider information can be revealed and spur fluctuations.
Any trade entails risks. In over-the-counter, it is particularly crucial to scan counterparties to eliminate any probability for a client to unintentionally engage in questionable or criminal activities. You can reduce risks if you choose a trusted over-the-counter desk.
How Does Secure Crypto Desk Look Like?
A chief criterion for finding a proper OTC providers is their ability to transact in fast-growing markets under high volatility and illiquidity. The best services adapt to market uncertainty, balancing between confidence and humility, and offer their customers facility and liquidity. Other parameters embody:
- Cold storage;
- Reserve fund;
- Solid reputation.
Moreover, no need to mention a license. In spite of unlicensed desks being more profitable, the risks they encapture, from money theft to copartnership, go beyond potential revenue. White agencies are regulated, meaning clients are protected by the legislation of a certain jurisdiction.
Key Takeaways
After all, OTC environments are a convenient trade-off for serious amounts of core crypto, like bitcoin, ether, litecoin, tether. Regardless of its limitations, namely information leakage and high risk, with the latter being easily encircled by interacting with proven providers, such crypto desks are a satisfactory means to buy, sell, lend, and borrow virtual money confidentially and at a stable price.
