How does OTC trading work?

Understanding the OTC markets can be quite complex. This guide explains it in simple terms. Read our guide to get a better understanding.

OTC stands for over-the-counter. In trading terms, over-the-counter means trading through decentralised dealer networks. Discover how OTC markets work here.

Trading Bitcoin is not just about making deals for amateurs on major crypto exchanges. OTC trading plays a big role in the life of the coin market. OTC stands for Over-the-Counter trading. It is mainly engaged by major players, i.e. miners, early investors or entire organizations.

What is OTC trading?

This is a transaction that takes place directly between two stakeholders (without the influence of exchanges). OTC trading had been around long before the crypto market. With its help, financiers can make large transactions with a huge number of trading instruments such as stocks and derivatives. Unlike traditional exchanges, the OTC market is decentralized and has no specific physical centers in the world. There can also be intermediaries, with representatives of two parties.

In traditional OTC markets, OTC trading is especially useful when the shares of a small company cannot yet go public. Those who want to trade in securities do without exchanges and make transactions with each other.

On the crypto market OTC transactions are often made by those who want to sell or buy a huge amount of coins. For example, it is quite problematic for a large miner to eliminate its Bitcoin reserves through traditional exchanges. He can sell them directly to a second interested party, without centralized intermediaries.

According to analysts from Digital Assets Research and TABB Group, daily volumes on OTC deals are higher than in ordinary trading on exchanges. That’s why some large trading platforms (Binance, Coinbase and Circle) started to provide OTC brokerage services.

Who’s not trading on the exchanges?

The main sellers are large miners, which sell the mined bitcoins to institutional investors. In October 2018, representatives of Cumberland’s OTC transaction platform reported that most of the company’s work is done during Asian trading sessions. According to experts, it is at this time of the day when Antpool and are selling their stocks of mined coins.

Their clients (large investors and organizations) prefer to make transactions bypassing exchanges. In other words, in a case where there are many bitcoins, there will almost always be OTC trading.

Why would ordinary users need an OTC deal?

If you need a certain level of liquidity and anonymity, OTC trading is an ideal solution. For example, you have an impressive amount of crypto, which you bought a long time ago. After the rapid rise of Bitcoin price the value of your savings soared to the sky, so for a quick sale you need a rich buyer who can pay for everything at once. Sometimes there is not enough liquidity on the regular crypto exchanges, but a large investor can provide it.

Besides, anonymity is very important in such cases. In order to execute a large trade order, the exchanges will require proof of identity from you, so you will have to forget about secrecy here.

Finally, the direct sale of cryptocurrency will have almost no effect on its price on the exchange. A large transaction will not bring down the value of the asset, so both parties will remain on the plus side.

How much cryptocurrency is needed to perform OTC transactions?

Intermediaries who work with large institutional investors work with exorbitant amounts. Smaller companies have a more grounded entrance threshold.

For example, the OTC platform from Bittrex requires its clients to have the equivalent of their transactions amount greater than $250 000. Poloniex has the same restriction. But Binance prefers to count in bitcoins, here the deals should be bigger than 20 BTC or about $219 000 dollars at the exchange rate to date.

Coinbase has a special service Prime, where only a closed group of institutional investors can get. Less customers should pay attention to Changelly, here the starting limit starts from 10 BTC or $110 000 dollars.

Is there any problems with OTC trading?

As with any other case, you must identify fraudsters in time and take into account the risks involved in making the transaction. Sharp bursts of activity in OTC trading occur after exchange hacking. Hackers want to drain a large number of stolen coins. Naturally, everything happens anonymously.

They can also use psychological pressure techniques to trick the buyer. There are known cases when the fraudsters gave false information about non-existent bitcoins and then hid with the money given to them.

What are the solutions to these problems?

Trading platforms are actively working on creating custodial solutions for large investors. Analysts expect that OTC deals market growth will continue in the future. Accordingly, large trading floors will try to adjust to the growing demand. For example, Fidelity’s fifth largest asset management company is launching a cold storage facility to serve firms that provide services to large customers. At the same time, Coinbase also deals with problems related to OTC trading.

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Andrey Costello

Bitcoin-maximalist. Optimistic family man and miner with six years of age. I write about complicated things from the future for people of our days.