OTC trading - over-the-counter (OTC), as the name implies, is a transaction between two interested parties without oversight from the exchange.
A wide range of assets is traded in this way, from commodities to financial instruments such as stocks and derivatives. Unlike traditional exchange trading, this market is decentralized and does not have a physical location, since all trading takes place exclusively through dealer networks. At the same time, traders do not need to participate in this process personally - they can turn to brokers and OTC offices for help.
The OTC also trades securities that, for various reasons, are not listed on official exchanges. For example, because small companies are unable to meet the listing requirements to list their shares for official trading. Or because they cannot pay the exchange fees. The only option left for them is over-the-counter trading.
Despite the risks inevitable when conducting direct deals, this type of trading also has huge advantages - freedom and much greater opportunities. Therefore, OTC attracts not only private investors, but also large traders and even full-fledged commercial giants. It is through these types of trades, the shares of Nestle, Bayer, Danone SA and many other large companies are bought and sold. But speaking truly, this can't be done just anywhere, the majority of trades are going on OTCQX, one of the three largest OTC markets.
As for the world of cryptocurrencies, OTC trading was primarily interested in those who are ready to sell large volumes of coins - successful miners and early crypto investors. And when somewhere happens offering, demand will surely arise, since many private traders do not particularly like to cooperate with exchanges.
So OTC is considered extremely promising for crypto investors. So much, that even in the midst of the "crypto winter" (a period when the price of bitcoin and other cryptocurrencies showed a significant decline), large companies such as Binance, Coinbase and Circle opened their own platforms for OTC trading.
By some estimates, the daily trading volume on OTC has already exceeded that of the official exchanges. Researchers from Digital Assets Research and the TABB Group, for example, found that in April 2019, OTC markets provided trades worth between $ 250 million and $ 30 billion per day, while official exchanges only provided up to $ 15 billion.
Who are the main clients of cryptocurrency OTCs?
The main sellers are cryptominers, and the buyers are hedge funds and institutional investors.
In October 2018, the Cumberland OTC desk - the Chicago-based crypto trading department of DRW Holdings LLC - reported that majority of the deals were made during "Asian" business hours. Experts speculated that this could be a sign that major Asian miners such as Bitmain's Antpool and BTC.com are selling coins through over-the-counter trading.
However, the OTC market does not depend only on miners. Wealthy private investors, payment systems and hedge funds are also actively involved in trading, according to a Reuters study. The most prominent players were men between the ages of 20 and 30, and transactions were carried out through online messaging services such as Telegram or Skype, as well as through brokers and specialized OTC tables.
Some experts also believe that institutional investors, on whom large-scale crypto adoption may depend in the future, are also interested in trading without using the services of large exchanges. There is no direct evidence of this, but there could be indirect signs. Major crypto companies such as Huobi, Coinbase and Bithumb are known to be launching their own OTC platforms aimed exclusively at institutional investors.
In summary, it can be safely argued that anyone who wants to buy or sell large amounts of crypto without excessive regulation is interested in OTC trading or an intermediary that working in this area.
Why a regular user would need an OTC?
At least because such platforms offer high liquidity and a very decent level of anonymity.
Let's say you want to sell a decent amount of altcoins that you were able to accumulate in the early years of cryptoeconomics. Of course, you will be looking for a place with good liquidity so you'll be able to fully realize your assets. Now, most experts agree that the liquidity of even large cryptocurrency exchanges is far from the optimal level. Therefore, either you will sell your assets for a long time and in parts, or quickly, but within the framework of OTC trading.
All this is connected with another problem that traders often face - with a serious influence on the market from large transactions. You can't sell a thousand bitcoins on the exchange and not seriously affect their rate at the same time. But within the framework of OTC trading, this is quite possible, since such a transaction will not appear in the general order book.
Also, if you are dealing with large amounts of money, then you probably want to keep your identity private. Alas, this is impossible in cooperation with exchanges. But the purchase of assets from individuals can take place without disclosing personal data. And it will also allow you to avoid unnecessary attention to a large-scale transaction.
And one more moment. Even if you are not a major player in the cryptocurrency market, you can still get in the way of daily and monthly limits for stock trading.
How much crypto does it take to start trading on OTC?
Everything is rather ambiguous here. Usually, you need to have a very decent amount. According to Cointelegraph's OTC cryptocurrency trading data, the Bittrex-based platform starts trading from $ 250,000. The same goes for a product from another exchange, Poloniex. However, this applies mainly to those traders who work with institutional investors.
But the OTC market is vast, so there are more affordable options as well. The non-custodial exchange Changelly, for example, has launched its own over-the-counter service, where the minimum transaction amount is capped at 10 BTC (approximately $ 100,000). And in private Telegram chats, you can sometimes find a person who will conclude a deal with you exactly for the amount that you will be ready to offer him.
How to choose the right OTC platform?
If you are not confused by the KYC and AML procedures, then feel free to start trading on OTC services from major cryptocurrency exchanges. If anonymity is more important to you, then only small companies and private networks.
Before starting over-the-counter trading, you must decide for yourself whether you are ready to comply with KYC procedures and provide intermediaries with your personal data. Alas. this is a prerequisite during working with services from major exchanges.
With small services, everything is much easier. To work with the Changelly, which were already mentioned, the client only needs to specify a work email and a messenger through which it will be convenient for him to contact the broker. Well, fill out the application form, in which you don't need to indicate personal data.
But if you work with brokers or other counterparties, then you should figure out in advance how much commission you will be charged for each transaction. It can be either fixed or variable, based on the size of the transaction.
The security and storage issues of cryptocurrency on OTC platforms are also important. It is also worth finding out if there is a possibility of insurance for traders. It will also not be superfluous to make sure that your personal assistant matches you in time zones and is ready to answer all your questions promptly.
And finally - the reviews. Preferably from reliable sources. And when you work with an intermediary, it is also worth to know how long he has been doing all this and what exactly he specializes in.
What are the pitfalls?
As with any trade, there is always the opportunity to face a scammer or settlement risks. That is why, before starting active trading, you should conduct your own research of the situation on the platform.
To begin with, the origin of large cryptocurrency amounts is very difficult to trace. An anonymous trader told Reuters that OTC trading is accompanied by a noticeable spike in activity every time a major hack occurs somewhere. Therefore, it is possible that the money that you receive as a result of a seemingly ordinary OTC transaction will turn out to be stolen. With all the possible consequences of this fact.
Next point. Many OTC cryptocurrency trading forums are full of complaints about scammers. They allegedly provide fake videos about the amounts they have in their possession, make false agreements and collect data about users using phishing methods. Such personalities are especially common on the LocalBitcoins platform. Fortunately, suspicious transactions can be cancelled, and it is quite possible to find really experienced intermediaries.
And the main problem is that OTC platforms almost never offer efficient storage of cryptocurrency, which allows them to reduce settlement and operational risks. For this reason, many traders use escrow accounts (accounts where money is blocked until certain obligations are fulfilled) and banking operations. This is both additional insurance and an opportunity to get your money back if the transaction turns out to be fraudulent.
Is there a solution to these problems?
According to most analysts, the OTC trading segment will grow steadily, so financial analysts and experts are already looking for ways to minimize risks and losses. This is necessary so that institutional investors can seriously work with transactions that involve cryptocurrency.