Over time, cryptocurrency markets are changing, and one of these changes include over-the-counter or OTC trading. This trading option allows participants to trade significant amounts of cryptocurrency anonymously. This article will discuss the basics of OTC trading.
OTC In Cryptocurrency
In conventional financial markets, an OTC broker helps the exchange of securities that aren’t listed on official centralized exchanges. An OTC trade depends on a dealer network that’s assisted by OTC brokers that negotiate directly with sellers and buyers over the phone or through a computer network.
In a cryptocurrency market, OTC trades are also assisted by OTC brokers that communicate directly with a seller and buyer. It’s part of the OTC broker’s job to find natural sellers and buyers for trading.
The primary difference between Bitcoin OTC and centralized exchanged-based trade is in the anonymity offered by an OTC desk, which doesn’t provide a public order book listing of trades. This enables large amounts to be transferred quietly without disturbing markets.
Benefits Of OTC Trading
Exchanging large sums in cryptocurrency is often difficult. If a large order appears on a public order book, it usually doesn’t get filled at the requested price. Sometimes, the order may be divided into smaller orders at varying prices, a phenomenon called price slippage.
With OTC brokers, slippage is eliminated by providing liquidity by matching sellers and buyers across their networks at a mutually agreed-on price.
OTC desks also offer anonymity that’s not found on a centralized exchange. A large order of 1,000 Bitcoin placed over centralized exchange could alert other traders and change its price. In OTC desks, however, such price movements are avoided.
Another way that centralized trading is more difficult when exchanging large sums is because of the order limits. However, OTC desks allow direct trades between sellers and buyers, and without any limitations.
Buyers And Sellers In OTC Trading
OTC brokers usually work with large-volume traders. While it’s impossible to exactly know these institutions or individuals trading OTC, it’s clear that the sellers and buyers here are usually professional high-net worth traders, asset management firms, or hedge funds, which trade at least USD$25,000 to USD$75,000.
There are also cryptocurrency miners involved on the selling end of an OTC trade, usually looking to divest large sums of mined cryptocurrencies. It’s also predicted that most of these traders are from North America and Asia because of the many OTC brokers in these regions.
OTC Market Size
It’s almost impossible to accurately determine the current OTC market size. But, the latest estimates point out that OTC desks may assist in most of cryptocurrency transactions. Considering the growing number of OTC desks, it’s obvious that OTC trading is more desirable for many cryptocurrency investors.
Since OTC desks facilitate the direct currency exchange between a seller and a buyer, settlement comes with a degree of risk. Although there’s no full guarantee that the funds will be delivered, it’s part of the broker’s function to confirm the reliability of the transacting parties. But, most OTC brokers use a third-party escrow account to minimize operational risk.
Clearly, OTC trading provides the liquidity to cryptocurrency markets. However, a potential issue is the obvious lack of data regarding OTC trades. Such data is significant since it provides the general market interest, which can help drive investment decisions.