Over-the-counter (OTC) — an essential and integral aspect in today’s crypto market

What is OTC trading?

Over-the-counter trading or also known as OTC is when two interested parties have a deal regarding an exchange of assets. Usually, these assets could range from commodities to derivatives or from financial assets to commodities and would be done with a trader with an OTC desk. In the traditional finance world, there are numerous reasons why people would want trade via OTC, some of which include the high listing or admin fees in which exchanges charge or stricter regulations which would discourage smaller companies from listing there.

OTC market for crypto transactions

OTC transactions for crypto has gained popularity and generated traction in 2018 as there was huge ready supply of digital assets from miners as well as early investors and on the other hand, we have a surge in demand as there was an influx of investors who have large capital who wanted to capitalize on prices during the crypto winter.

Outside of just miners and wealthy investors who dominate the market, there is also an increase in transaction volumes from the likes from hedge funds and institutional investors. This is seen as a positive sight for many in the crypto industry as the huge influx of funds from institutional investors is believed to be the catalyst that will drive crypto to mass adoption.

This trend has since prompted many major exchanges to set up their own OTC desk as they all wanted a fair share of this promising OTC market. Since 2018, it was estimated that OTC transaction volumes were as high as USD$30 billion per day which has higher than those recorded on major exchanges which were reported to have above USD$15 billion in volume.

Basically, anyone who wants to transact in huge volumes of crypto transactions but do not want to do so through an exchange to have faster and more seamless transaction or possibly better terms for the transaction could go through OTC transactions.

Some might be wondering “So how much do I need to trade in order to be part of this OTC scene?”

Usually, those OTC desks set up by major exchanges have relatively high minimum trading amounts which could range from a minimum of USD$250,000 or a minimum of 20 BTC per transaction. However, we would touch on later in the article where there are smaller players and exchanges where the barrier to entry is greatly reduced and traders could transact in smaller amounts.

Benefits of using OTC trading instead of a crypto exchange

Higher liquidity

Traders would also prefer to minimize the impact of such transactions on the market prices and by doing so, the large transactions would not appear on the order books of the exchanges. If you are transacting in huge volumes of crypto, the exchanges would not usually have the liquidity and the market depth for these larger transactions. OTC desks usually have the liquidity to handle large transaction volumes.

Avoiding slippage

This brings us to our next point which is slippage. As a result of the lack of liquidity for large transactions on exchanges, traders might end up prices moving unfavorably and having prices filling up at different prices which might result in a higher than the planned purchase price or lower than the planned selling price. Instead of having an order filled for a single price, the orders are spilled into multiple orders of different prices. OTC desks allow traders to let orders to be filled at a single agreed price.

Limitations of exchanges

There are also daily and monthly trading and withdrawal limit that exchanges impose on their users. OTC does not have the limitations that exchanges impose.

Potential issues/problems with OTC?

High barriers to entry

As mentioned, the minimum trading amount imposed by most OTC is usually in on the high side with at least a six-figure amount in terms of USD which deter traders or investors with lesser capital.

Settlement risks

There are still settlement and operational risks involved as there may be fraudsters who might be out there to scam your assets, so traders need to beware if they notice anything suspicious.

Fees involved

Depending on which OTC desk you are dealing with, the fees would vary and some might have a more complicated fee structure or even hidden fees which would result in potentially higher fees.

How do I choose an OTC desk and what features to look out for?

This is a non-exhaustive list of things to look out for in an OTC desk

• Transaction amounts — The minimum and maximum value of each transaction.
• Fees — The amount charged per transaction (fixed or percentage-based) and any other charges or fees involved if any.
• Sign-up process — Whether the on-boarding process has any KYC/AML requirements.
• Security and storage — Does the OTC have insurance or any trusted custodial solutions?
• Customer support — Are there any avenues where you could get assistance should you need any and if they are available 24/7?
• Reputation and reviews — The reputation of the OTC desk is important and you could look at how long they have been around as well as reviews from traders who have used them.

Tokenize Xchange OTC Desk

Having a $USD100 million coverage of insurance on our digital assets, our OTC desk at Tokenize Xchange always aims to cater to large institutional investors while still enabling traders who transact in smaller amounts (SGD$50,000) to have a safe and seamless experience dealing doing OTC transaction with us. While not only providing a competitive rate, we also ensure a timely settlement experience coupled with the highest standards of customer service and compliance.

What are you waiting for? Check out our OTC desk today!

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