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While Changpeng Zhao (Binance) and Arthur Hayes (Bitmex) get plenty of media attention and coverage for their respective companies, the OTC market seems to be forgotten about by the general crypto user base. We’re going to fix that with this article.
OTC, short for Over-the-Counter, is another way to trade stocks, bonds, derivatives, and currencies in both crypto and fiat markets. Trading on currency exchanges usually involves three parties: buyers (who set the bids), sellers (who set asks), and the exchange itself (which acts as the market maker). OTC trading cuts out the middleman (the exchange) and connects the buyers directly to the sellers.
It doesn’t matter how these parties connect because unlike stock exchanges, OTC markets are a bit less formal in nature and have no physical location. Usually buyers and sellers will communicate through chat groups, on the phone, on forums, etc.
The person seeking the trade (buyer or seller) acts as the market-maker by quoting the prices they wish to buy/sell a security, currency, or financial product at. This allows them to remain anonymous as they aren’t forced to disclose details of the deal to the public.
The OTC market is often used by smaller companies to sell their shares when the company is too small to be listed on a formal exchange. But just because small companies use the OTC market doesn’t mean the market itself is small, in fact it is the opposite. The OTC derivatives market is worth more than $400 trillion, according to BIS.org.
Three main OTC marketplaces exist: OTCQX, OTCQB, and the Pink Open Market. All are FINRA regulated, but are typically subject to fewer regulations than larger markets. This doesn’t mean wash trading is allowed, but there is certainly a bit more freedom when dealing over the counter.
The OTC Bitcoin market generally operates in the same way the global financial OTC markets do. It acts as an alternative to formal exchanges, and the first OTC desks were launched in 2014 by Circle because many Chinese miners, like Bitmain and Antpool, needed places to quickly sell mined BTC to finance their operations.
So, what are the main differences between Bitcoin OTC desks and fiat OTC desks? Bitcoin OTC desks operate similarly to penny stock OTC desks - allowing users to purchase large amounts of currency without moving the markets and subsequently, the price of their transaction.
Buyers looking to purchase 500 BTC, for instance, can opt to risk significant price slippage on an exchange, or go straight to a crypto OTC desk and order 500 BTC instantly at a fixed price.
The advantages of Bitcoin OTC desks:
How to access the OTC Bitcoin Market:
Determine your trade volume, frequency of trading, and legal structure.
Make a trade. Simple place a request through your desk by calling them or writing them through designated chat channels.
Claim your purchase. Typically an OTC will give you a bank account number to make a payment, while you give them a wallet address to send the crypto.
Fees are typically not associated with OTC desks, but the exchange rate you are offered may be a bit weaker than the mid-market rate at the time. Since OTC desks don’t make money through fees, they have to add a small margin on top of assets. Be sure to use only reliable OTC desks that have proof of their reputation.
Do not send money to unknown desks, because when something goes wrong it is nearly impossible in most cases to ever get your money back.
Bitcoin OTC markets are more popular than both regular stock and regular crypto exchanges. The volume of Bitcoin traded OTC is around $20 billion/day, because the illiquidity of crypto exchanges forces many large traders to seek exit and enter positions through OTC desks to avoid slippage.
There will always be a demand for Bitcoin OTC trading, but the market will almost certainly shrink as crypto exchanges mature and consolidate. Miners will probably continue to use OTC markets because it is one of the quickest ways for them to liquidate their assets without attracting attention.
Many large institutions and big players already utilitize major desks offered by Coinbase, Circle, Bitmain, Antpool, and Fidelity, so expect this space to become even more competitive over time.
When institutional money eventually enters the crypto space in earnest, these major desks will be their port of entry. Because of this, the space will continue to thrive and develop as a way for whales (both individual and institutional) to move money without pulling the market with them.
The author is not associated with any of the projects mentioned.
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