Why Bitcoin OTC is a Dangerous Hustle

Image by Pete Linforth from Pixabay.

OTC, or Over the Counter, trading is a method of trading assets outside of a formal exchange or market. Two parties (or, more likely, their representatives) will arrange to trade high-value assets directly. The practice is well-established in the stock trade, but it is quickly gaining popularity in the crypto world, as popular exchanges like Coinbase, Kraken, and soon Binance add OTC trading to their list of features. However, while OTC trading may provide some benefits to large traders, they also pose a massive risk for fraud, particularly for potential buyers.

What are the Benefits of an OTC Trade?

The concept goes back to the most foundational concept in economics: supply and demand. As supply rises relative to demand (or is expected to rise in the future, such as when a large seller is expected to enter the market), the price of an asset will fall and the seller will make less off of the trade. Conversely, if word spreads that a large buyer is planning to enter the market (thus increasing demand), the price will likely rise and the buyer will have to pay more for the same assets.

To combat this effect, large traders will often use an OTC desk or their personal network to arrange the trade without operating within established markets. The participants will agree on the terms of the trade in writing before it is carried out. Because the trade will not be listed on an exchange, it will not have an impact on the market price of the assets.

The Dangers of Bitcoin OTC

Long story short, by avoiding established exchanges, you are also giving up the various security mechanisms they offer. Of course, exchanges are not without their risks, but the chance of losing your crypto on a reputable noncustodial exchange is fairly limited and fraud by a counterparty is highly unlikely. These are some of the many ways that scammers may attempt to defraud you with Bitcoin OTC:

1. The seller may not have the Bitcoin that they claim to. Don’t be fooled if the potential seller sends video “proof” that seemingly shows the large amount of Bitcoin within their wallet. Any legit seller will not send this kind of video because there is no way for you to verify that the video is real. Dozens just like it are being circulated on the internet as we speak. To confirm that the seller owns the wallet that they claim to, you should insist that they send a signed blockchain message with both of your names (or chosen nicknames).
2. The seller has no intention of actually selling the Bitcoin to you. In many cases, trades will take place at a bank office, where the seller will hand over a flash drive in exchange for payment under the supervision of a bank representative. However, the bank representative may not confirm the contents of the flash drive before they allow the seller to walk away.
3. The buyer may get their payment refunded without having to give back your cryptocurrency. If your trade will be conducted at a bank office, you should find out the bank’s refund policies before agreeing to the trade. Some bank policies will allow this to occur since they can force the payment to be refunded, but they do not have the means to force the Bitcoin to be returned.
4. The seller attempts to double-spend. In this scheme, the seller’s partner in crime will transfer the Bitcoin to another wallet as the trade is occurring.
5. The counterparty may draft an ambiguous contract. Make sure to have your lawyer review any written agreement before it is signed to ensure that it is legally binding and sufficiently detailed.

Warning Signs of a Suspicious Trade

• The counterparty refuses to provide valid identification or simply sends a picture of their ID to you. Because OTC trades don’t have the security procedures of established systems, they rely on the trust of both parties. You can’t trust someone if you don’t know who they are.
• When you request the location of the trade to be moved, they balk. They may be trying to pull Tactic #3 on you.
• Typos in any written agreement are an immediate red flag. Enough said.
• The seller refuses to send a signed blockchain message to confirm ownership of the wallet.
• The seller’s wallet address is for a different type of wallet than the seller claims to have. For instance, if the seller says that they have a TrustlessBank wallet, but the block explorer shows that the address they gave you is actually a Bitstamp wallet, then it’s time to back out of the deal. They clearly don’t own the Bitcoin and have no intention of selling it to you.
• The seller insists on selling the entire amount at one time. It’s much safer for the buyer to purchase the Bitcoin over several payments, thus reducing the amount they will lose if the seller tries to scam them.

This is certainly not a complete list of possible schemes or warning signs, but it should provide a starting point for examining the legitimacy of a potential deal. However, according to Edward Fricker, co-founder of TrustlessBank (the world’s first multi-coin, lightning swap wallet), “The best way to stay safe while trading crypto is to use common sense and make all trades through reputable, fully noncustodial services.”