How Does A Bitcoin Over The Counter (OTC) Market Work? [Explained]

Everybody involved in the crypto ecosystem knows the importance of crypto exchanges. Often times, the CEOs of these exchanges are seen as the rockstars of the modern finance world — yet nobody seems to know about and completely understand the importance of the OTC market.

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 in general 

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

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:

• Increased liquidity. Crypto exchanges typically have low liquidity. Bitcoin OTC desks provide opportunities to purchase large amounts of crypto in short periods of time WITHOUT slippage.
• Price protection. As mentioned above, price slippage is bad. OTC orders don’t alter prices when moving millions of dollars around in the market.
• Anonymity. Order depth doesn’t show up when using OTC desks.
• Fiat support. All crypto OTC desks support fiat, while many crypto exchanges do not.
• No limits. Coinbase limits purchases to $25,000 per day. Kraken only lets you withdraw $2,500 per day and $20,000 per month. Circle imposes a withdrawal limit of $3,000 per week.
• Rare tokens. Less common tokens can be bought in larger amounts than on exchanges.

How to access the OTC Bitcoin Market:

Determine your trade volume, frequency of trading, and legal structure.

• Moving tens of millions a week? Contact the OTC desk at a major exchange.
• Moving less? Head to boutique OTC trading desks like ICO Malta or IBIS Bitcoin Brokers, which offer a certain degree of professional hand holding throughout the process.
• Although there is no set rule, major exchange OTC desks are typically better options for institutions and funds who are geared towards satisfying the extensive due diligence and documentation required to deal with them, whilst boutique desks can easily handle orders of as little as $10m000 on an ad-hoc basis..

Make a trade. Simple place a request through your desk by calling them or writing them through designated chat channels.

• You’ll place an order, receive confirmation and further details on how to proceed and claim your crypto after making payment.

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.

Popular misconceptions about OTC trades

• OTC desks don’t exist to get better than exchange rate prices, instead they help large orders lock in prices for large orders.
• “OTC desks execute post-funded trades.”

• OTC desks have no reason to trust you, so nothing moves until both parties have deposited their side of the trade.
• “OTC desks demand proof of coin or proof of funds before trading.”
• This was popularized by scammers and hackers as a method of identifying potential targets. Reputable OTC desks would never provide this as it would deanonymize  their clients’ wallets. Nor will they ever request private financial information that wasn’t strictly necessary for the trade at hand.
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• “You get a discount for larger orders.”
• Nobody will offer you a discount for buying more, or pay a premium for a large trade. The price of a currency is set by market demand, and the major perk of using an OTC desk is locking in a price for large orders.
• “Everyone can use OTC markets.”
• Yes, LocalBitcoins is an OTC market for smaller traders. However, you’ll almost always pay a premium on LocalBitcoins when compared to exchanges, because sellers are looking to make extra money by going through the trouble of selling locally.

What’s going to happen to the OTC market in 2020?

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.