OTC offers in the financial markets is nothing new. Broker-dealer networks have been used to trade securities like stocks, bonds, derivatives, foreign currencies, and, more recently, cryptocurrencies. As cryptocurrencies vie for an established status as a legitimate asset class, these backroom deals are increasingly playing a greater role in the crypto ecosystem’s growth.
Here’s a highlight of how OTC offers fuel the crypto market.
Understanding the Basics of OTC Crypto Trading
Over-the-counter (OTC) crypto trading is an alternative to centralized exchange trading for crypto market players who deal in large sums. These players are generally regarded as whales as they buy and sell crypto volumes that far outweigh what the majority of conventional crypto investors purchase on exchange platforms like Binance, KuCoin, etc.
So, why do they choose to trade on different platforms from other investors?
Well, because they don’t want others to know they’re moving such huge volumes. And, no, not because they don’t want others to steal their funds. However, privacy is particularly important in these sorts of high-volume trades.
If the majority of the market were to know about major OTC offers, it would significantly impact the overall price of that coin, as other investors might try to buy or sell depending on the case. Consequently, the whale may incur significant losses. There are many more reasons why they choose to trade on OTC platforms, but let’s talk about how it happens.
It essentially works like two traders exchanging value. An OTC trade could be either crypto to fiat, e.g., purchasing 5 ETH for an agreed price, or crypto to crypto, e.g., exchanging Solana for tether.
Whichever the case might be, a typical OTC crypto trade proceeds as follows:
- A buyer/seller reaches out to a trusted Bitcoin and Crypto trading OTC desk like this: https://www.independentreserve.com/sg/features/otc with an OTC offer for the sale or purchase of a certain amount of crypto at a quoted price
- The OTC desk puts the word out or reaches out to another party who might be interested in the deal
- The other party either accepts, negotiates, or rejects the OTC offer
- Should they agree on terms, the exchange proceeds.
However, depending on the type of OTC desk, the exchange may proceed according to one of two ways:
- A Principal OTC Trading Desk initiates the purchase with its funds as soon as an agreement is reached.
- An Agency OTC Trading Desk initially charges the customer a fee to act as an intermediary between both parties and initiates the trade only with the customer’s funds.
Effects of OTC Crypto Trading on The Crypto Market
So, how do these kinds of arrangements affect the entire crypto market? After all, the mainstream crypto market is essentially unaware of these trades.
The following points highlight some effects of OTC crypto trading on the crypto market:
Decentralization
The whole point Satoshi Nakamoto was aiming at by launching Bitcoin is the concept of a decentralized digital currency. Now, clearly, the proliferation of cryptocurrencies today shows that the “digital” aspect of that point is taken care of.
However, observing closely the heavy reliance on crypto exchanges shows that the “decentralization” aspect of it is gradually being eroded. Crypto exchanges are fast becoming the traditional central exchanges Satoshi aimed to eliminate by creating Bitcoin, as they’re increasingly taking on more management and control responsibilities. OTC, on the other hand, restores a bit of balance by keeping buyers and sellers in total control of their trades.
Contributions to Market Liquidity
Supply and demand forces heavily influence the ease with which a crypto asset can be bought or sold without significantly impacting its price. As you might well know, the kinds of trades that occur at OTC crypto desks can exert high impacts. Put simply, if OTC trades were executed on centralized crypto exchanges, it would result in price slippage.
Exposure to Unique Cryptocurrencies
More so, many altcoins with small market capitalizations encounter liquidity issues on public exchanges. However, the fact that OTC desks maintain a network of high-volume buyers and sellers makes it possible for them to facilitate high-volume trades of these less liquid assets.
This diversification of available assets contributes to the overall trading traffic in the crypto ecosystem. As a matter of fact, many investors speculate “the next Bitcoin” based on significant purchases of these unique budding cryptocurrencies.
Price Stability
Nonetheless, the entire crypto market enjoys sane prices because the OTC desks “protect it from the whales.” The anonymity and privacy of these trades ensure they avoid the order book, which in turn reduces the impact of their high volume on crypto prices. As a result, conventional traders and investors in the exchange markets get better pricing options, and that’s basically one of the factors responsible for the preservation of day-to-day crypto transactions for smaller market players.
Investor Speculations
Despite the privacy and anonymity of OTC crypto trades, words eventually get out to investors. Many of them use these details as a compass for predicting the “true prices” of different cryptocurrencies. Furthermore, they help to gauge the market’s direction of movement.
These speculations fuel the crypto market in that they dictate the decisions of many traders and investors.
Speed and Efficiency
Crypto transactions on OTC desks are between only two entities, so they can be settled quicker than trades on centralized exchanges. Exchanges often have to mediate millions of trades between multiple customers. Although many of them claim to facilitate transactions in 10 minutes to an hour, it might take longer than that, especially when certain disputes need to be resolved.
Furthermore, OTC desks are not bound by operational hours. So, trades can essentially be initiated and executed whenever interested parties decide. This benefit is a major factor driving the adoption of cryptocurrencies by high-net-worth individuals who still entertain a level of skepticism.
Conclusion
OTC crypto trades will likely continue to rise in the rapidly expanding cryptocurrency industry, especially as market adoption and regulatory oversight on centralized exchanges grow. While they offer obvious advantages for high-volume traders, market players should be aware of the possible risks and complications to ensure maximum security.
For now, the market continues to enjoy the liquidity, price stability, speed, and efficiency it provides.
