Mindrock Capital


Fear, bewilderment and second chances in the OTC crypto market

By Pavel Cherkashin

Large over-the-counter (OTC) deals in the cryptocurrency market are generally opaque to outsiders. As someone with access to this space, I’m ready to unveil some interesting observations about the main parties involved in these deals and how their interactions lead to a cultural clash.


There are two primary types of large crypto buyers: large exchanges and wealthy families.

Large exchanges are the main buyers. To supply the constant demand for bitcoins, they buy them wholesale at a discount and immediately sell them at market price in many small transactions. If they don’t have enough money to buy them wholesale themselves, they partner with investment funds. Funds are interested in financing such transactions because they buy with a bigger discount and sell with a smaller one. The exchange rate is fixed at the moment of the transaction, which is beneficial for both buyers and sellers: Sellers know they didn’t sell too low and buyers can minimize their risks — for example, if they know they can sell 3,000 bitcoins daily via their exchanges, they can sign a contract for 100,000 bitcoins but buy only 3,000 bitcoins each day and sell them immediately.

Large family offices and high-net-worth individuals constitute the second largest group of buyers. They hire people with many years of experience as investment specialists at the world’s largest banks and prefer to work following standard bank procedures. Most of these buyers simply want to diversify their assets and make long-term investments in cryptocurrency, especially now when bitcoin is believed to be undervalued relatively to its full potential. (These investors should consider index funds, such as our MRX Index fund.) However, a small number of these buyers are trying to use cryptocurrency to skirt laws that make it difficult to transfer their capital out of a particular country and cannot buy bitcoins directly on an exchange because they might not pass the “know your customer” (KYC) procedure.


Wholesale bitcoin sellers are probably the most curious party of OTC deals. Often, they are random people who have obtained a large number of bitcoins, for example, by mining them or by fundraising for their ICO projects. They have them in their crypto wallets and have no clue about what to do next. Large investments banks will not serve them, even if they have capital of hundreds of millions of dollars, because they will neither pass the KYC procedure nor be able to prove the source of the bitcoins — banks simply don’t understand what it means to “mine” 100M of dollars.

Not everybody would agree with that nowadays

It is easy to lose one’s mind in a situation like this. Just imagine, these sellers have been eating instant noodles their whole lives and now they have millions in their accounts. But they don’t have a clue how to sell the bitcoins, and they have no experience managing such vast sums, whether they are in cryptocurrency or fiat money. They do not realize that a professional asset manager could structure a trust or a management company for them and help them sell their cryptocurrency officially and correctly, optimize their taxes, and manage their assets.

The cultural clash

There is a cultural clash between large sellers and buyers in the OTC market. On the one hand are the sellers, who became rich so quickly they haven’t had a chance to really adapt. Often, they look nothing like what traditional players in the market expect to see: They are embarrassingly young, wear the same torn clothes every day, and are just happy they finally can afford unlimited amounts of weed and living near the beach. On the other hand are the investment bankers, who wear suits, work in a disciplined corporate environment, follow strict workflows and spend their days dealing with paperwork.

As a result, buyers and sellers often refuse to talk to each other. Sellers are rightly worried about working with criminals, but they find investment bankers to be intimidating, stuffy and elitist, and they worry about being taken advantage of or being reported to tax authorities. Buyers, for their part, cannot fathom how sellers with 100M dollars in bitcoins can miss important calls because they were drunk or high, and won’t take them seriously when meeting them because of their clothing and manners. They suspect fraud, even though this is actually the normal state of things on the market now. It’s a rare cultural and historical phenomenon, rather like the Wild West, when people would pan for gold and, not knowing what to do with it, go to a bar and try to use it to pay for some booze.


Therefore, there is a need for intermediaries to connect buyers and sellers. Established and regulated firms do not generally get involved in crypto deals because the buyers and sellers are not known till the very last moment and can turn out to be unsavory characters, such as people who intend to launder money.

Instead, the most common intermediaries in OTC deals are lawyers — often second- and even third-tier lawyers who are unknown on the traditional market and who can be pretty shady. You don’t need a private investigator to uncover their secrets; a Google search will bring up scandals like misappropriation of customer funds, connections to mafia organizations in various countries, and crimes such as stealing money from an escrow service. Unlike professionals from large first-tier firms, these people are not afraid that crypto deals will have a negative impact on their reputation; rather, they see an opportunity to build a new professional reputation, become famous, get recommended and retire wealthy.

The same is true for many other intermediaries as well. For instance, banks that are open to OTC crypto deals are usually unknown in the traditional economy and are crypto-friendly in order to get their chance to succeed quickly. Indeed, the crypto market, and especially its OTC part, is a new environment where anyone can succeed and rebuild their reputations. This is the irony and the opportunity of the market. Basically any market players — from individuals to governments and countries — can make the leap from low-tier player to the big league.

It’s not hard to see why everyone wants to get into an intermediary role. The average discount for a long-term wholesale deal with a daily supply of 1,000–3,000 BTC can reach 8–10%. Cutting a 0.1% commission from the discount on just one such deal could make a wealthy living for a broker.

Unfortunately, not all intermediaries use the opportunity properly. Due to the unregulated nature of the market and its weak legal and contractual base, the level of fraud is unprecedented: More than 90% of all offers on this market are fraud or phishing (hunting for information about real sellers and buyers), and 99% of agents have not closed a single deal (and many of those who did retired after their first successful closing). The largest institutional escrow platforms for such transactions do not even have a website; they onboard new clients only by recommendation and insist on using secured email like Protonmail.ch.

The lack of trust is a huge problem in large over-the-counter deals in the cryptocurrency market, as the barrier to enter it is low. Nobody can tell who is an expert, who has good intentions and whether somebody’s shady reputation in the past should be a deal-breaker, which leaves the market struggling under the weight of a vast network of intermediaries. But there is really no alternative because trusted providers in the traditional markets will not get involved with the crypto market until it is properly regulated.

Despite all the issues, it is fascinating to watch the formation of the new market and new business community, which sooner or later will get used to the cultural differences of its members, find a common language and — most importantly — get rid of those who are not ready to work hard and take the opportunity to rise seriously and professionally.


Pavel Cherkashin is a cofounder and a managing partner at Mindrock Capital and a managing partner at GVA Capital. A former angel investor and entrepreneur, he now invests in cryptocurrency, artificial intelligence, blockchain and self-driving tech.

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