For most traders and investors who participate in the cryptocurrency market, especially retail traders, the OTC (over-the-counter) market can prove to be a mysterious phenomenon. OTC trading is not only used in crypto markets but participants of other traditional financial markets use OTC trading as well. OTC trading is known to involve high volume trades directly between two parties, without an exchange platform.
Ins and outs of these OTC trades, for crypto trading, in particular, leave many with questions about how trades actually work, liquidity, price slippage, how dealers hedge risk, and the potential effects of OTC trades on the price of crypto assets.
Let’s look at some things that might help you understand better and try to illuminate this “under the radar” side of crypto OTC trading.
OTC or over-the-counter trading is when a trade is made directly between two parties and the trade is executed without the help of an exchange platform. It is organized in a marketplace that doesn’t have a central location but among groups of dealers. Usually, one of the parties will be a firm and will be referred to as the OTC desk. In an OTC crypto trade, there will be two parties that trade both crypto-to-fiat and crypto-to-crypto.
Foreign exchange, also known as forex, is the most well-known OTC market among all asset classes and here the currencies are traded through a network of banks instead of exchanges.
Crypto OTC trading can take place on different platforms. Firstly, let’s look at trading firms. If you require special treatment. You can use such platforms in order to reach out to traders who specialize in big transactions. Moreover, you can avoid slippage by gaining access to huge sources of cryptocurrency liquidity.
Chat rooms are another place where crypto OTC trading can take place. The first large Bitcoin OTC trade happened in a chat room. However, today this is not as common as it once was but trades still take place in chat rooms because there are chat rooms that allow peer-to-peer transactions.
A “dark pool” is another platform where crypto OTC trading can happen. These dark pools are non-public, private exchanges that can not be accessed by the general public. These markets are non-transparent and have no order book. A dark pool will allow investors and traders to trade with each other on their own.
Crypto OTC trading offers many benefits to traders. One of the major benefits is that there is no need for an exchange or a third party. There is no need to share any personal information. As you are in direct contact with the other party, the process can become easy and simple as the sellers and buyers can cooperate. You will not have to register or open an account with an exchange nor will you be required to pay any commission. Moreover, you will be able to trade large amounts of crypto assets in short periods of time and without slippage. You will also gain access to greater opportunities and high volume traders with high net worth can trade their crypto assets without any limits.
However, crypto OTC trading could also present several disadvantages and it is important to be aware of them. There will be a minimum order amount and traders who do not have enough capital may not be able to gain access to the OTC markets. OTC may be a good option if you are looking to trade huge amounts of crypto assets but it may also be time-consuming at times as the large transactions may take time to process.
You might have already started wondering about the required amount of crypto assets for OTC trading. As there has been massive growth in the world of cryptocurrencies in the last few months, this has become a common question from those who are new in the crypto OTC markets.
It is important to note that there are desks that only allow users to perform transactions larger than 20 Bitcoins. However, you should be able to find some smaller desks that will require you to have only 10 Bitcoin in order to begin OTC trading. There may be other desks that will allow the investors to trade the equivalent of at least $250,000 or more. It will not be easy but you might be able to set a deal with someone directly in a chat room to sell the same amount of crypto assets that the other person is looking to buy.
As the cryptocurrency markets continue to grow, the crypto OTC markets may also evolve and continue to grow steadily. Financial insiders are working on making these deals easier and safer so that more institutional investors can trade their crypto assets. The process requires less formality and offers a lot of conveniences.
However, it is worth noting that the price of Bitcoin is around $59,000 right now, and not every investor and trader will have access to a huge amount of capital that is required to start crypto OTC trading. There are a few drawbacks but a lot of people also think that they are fully compensated with the great advantages this opportunity provides.