Off-Exchange Trading: Will It Become a Success in 2020?
Today, more and more market players are abandoning traditional exchanges in favor of OTC trading. The merits of this smart choice are obvious: major transactions, lower commissions, and more stable prices. At the same time, less regulation, paired with a lack of reliable information, creates significant risks for traders.
Over-the-Counter Explained
Publisher Arthur Elliot and financier Roger Babson founded the National Quotation Bureau (NQB) in 1913. The company’s primary concern was to inform potential investors about stocks not usually listed on major exchanges — these stocks are known as penny stocks. For a long time, the companies’ names, quotations, and brokers’ contact details were published on sheets of pink newsprint. Then, in the late twentieth century, NQB began posting quotations online.
Over the years of its existence, the organization has changed its name several times. Today, it is known as OTC Markets Group. It is the largest platform providing price and liquidity information for almost 10,000 over-the-counter securities where all purchases and sales are available electronically.
“OTC” stands for “over-the-counter,” and it refers to securities trade by broker-dealers. This tool is one of the most powerful in the traditional financial market because it allows you to perform transactions at any time. As you know, stock exchanges operate only on weekdays and during office hours. Therefore, all weekend trading takes place through dealers. The price of stocks and other financial products is defined by supply and demand. Therefore, the asset value on weekends can vary widely from stock quotes.
OTC in the Digital Space
OTC trading started burgeoning in the cryptocurrency market in 2018. Its primary advantage is this: to handle a large trade on the traditional exchange, you need to make small ordinary transactions. What is more, due to high volatility, the exchange rate may move every time. Off-exchange trades, in turn, involve one big trade. However, as a rule, the transaction is not recorded in the order book and is not displayed publicly, which guarantees complete confidentiality for both sides.
In a recent study, Digital Assets Research proved that daily volumes on off-exchanges are much higher than in normal stock trading. Lately, some biggies such as Binance and Coinbase have launched an OTC trading service. So far, they are mainly focused on cryptocurrency whales and use this tool to attract large operators. The director of sales for Coinbase’s institutional businesses, Christine Sandler, expressed this official position. As Sandler declared,
“We launched our OTC service in addition to the traditional exchange, as we saw that many institutional investors use this financial market to step into crypto trading.”
Binance, the fastest growing exchange for trading cryptocurrencies, has proposed several conditions to those who wish to conduct OTC trading. Traders must be at least at the second level account and have 20 BTC order value.
Even though OTC is usually for big players, this mysterious world is also available for medium-sized investors. A few years after the appearance of BTC, all transactions with the digital currency by Satoshi took place only on the OTC market. Centralized exchanges came into existence after a while, but OTC platforms where users can purchase small order sizes remain. These platforms are mainly P2P ones, such as LocalBitcoins or LocalEthereum.
There are special OTC platforms for processing large orders. Unlike P2P systems, a popular alternative to exchanges is not just a middleman. As an official service, the platform assumes responsibility for deals from customers who risk a lot of money. What is more, it sets out a number of rules for their safety because the integrity of the brokers is extremely important. They check counterparties and help clients avoid dubious or even criminal transactions. Usually, off-exchanges work only with top virtual currencies, such as BTC, ETH, and LTC, and they don’t charge a commission for their services.
Decentralized OTC platforms have extensive links to the world of crypto. Hence, they can provide liquidity and follow-up on requests from huge clients and companies. Typically, OTC trades begin with receiving a buy or sell order and seeking a counterparty. Afterward, the buyer informs the seller of the total transaction amount and the asking price. The seller responds with his price.
Fragmentation of a single order between multiple exchanges is not uncommon. It is also possible to insure positions and then sell off the shares.
Is It Worth It?
We are inevitably asked if it is worth paying attention to the market outside of the crypto exchanges or not. That’s not our decision to make — it’s yours. However, for those who purchased a large amount of digital assets when they first came out, OTC trading has become an excellent opportunity to fast sell at a bargain price. When a coin with a stellar reputation reaches its maximum value, only a few exchanges can boast a sufficient level of liquidity, and only a big shot investor can provide it. Today, platforms such as itBit, Circle Trade, BitStocks, Genesis Trading, and others are the best known among cryptocurrency whales.
If you are not a cryptocurrency whale, that doesn’t mean that OTC is not for you. High net worth individuals, institutional investors, hedge funds, private wealth managers, and crypto funds all stand to benefit from OTC trading. Users without relevant experience should be more careful — the risk of error is too high for newcomers. Avoid dubious contractors and choose only reliable, professional brokers.
Due to service quality, increased anonymity, the ability to negotiate with a counterparty, and the ability to process large orders without disrupting the market price, OTC has become an essential element of the global financial market system. That’s why the crypto society firmly believes that this simple and fast way to trade Bitcoin in bulk will worm its way into wider popular culture in 2020. As a result of technological advancement, this potentially interesting tool is now widely accessible.
