OTC Crypto Trading Work
The over-the-counter (OTC) market for cryptocurrency is similar to forex trading in many ways. Both have transparent pricing and readily available liquidity. Liquidity in the crypto market is fragmented across multiple venues, so OTC desks combine liquidity from multiple exchanges and inter-dealer networks. These desks connect clients to multiple sources of liquidity, potentially saving them money on exchange commissions. How does it work?
The New York Stock Exchange and other exchanges act as intermediaries between buyers and sellers. They provide a venue for traders to post their own bids and offers and facilitate trades between them when the bids and asks overlap. These trades are out-of-the-public and can be monitored on sites like CoinMarketCap and CNBC. Traders can verify the authenticity of each other through KYC.
Decentralized OTC crypto exchange
In contrast, OTC trading enables greater institutional involvement in the cryptocurrency market. But it’s not entirely transparent. OTC trading brokers can be as fraudulent as exchanges, and disreputable ones are more difficult to identify. Even if there are hundreds of reputable exchanges, there are still plenty of bad actors. If you’re investing in crypto, you’ll want to make sure you’re dealing with legitimate brokers.
How Does OTC Crypto Trading Work?
In cryptocurrency, OTC trading allows you to trade directly with other investors without the need for an exchange. This makes it more secure and efficient, and the price range is far wider than on the open market. In 2018 alone, billions of dollars worth of crypto changed hands over the counter. This enables the trader to get much better prices than they could on the open market. The original Bitcoin OTC desks were run by mining companies. This was because they had access to large volumes of BTC, and it was more convenient for the counter-party to sell in bulk.
OTC trading desks are becoming more popular because of the volatility of cryptocurrencies. This enables traders to get into the market without fear of losing their money. While some exchanges charge a fee for OTC trading, others offer low or even free trading desks. Moreover, exchange-based OTC doesn’t require KYC/AML checks, though some may require additional documents or selfies. A few disadvantages of OTC trading desks are detailed below.
Coinbase, the most popular cryptocurrency exchange, is among the first OTC exchanges. It onboarded over 50,000 retail accounts a day during the crypto boom, but it didn’t take off with institutions. Coinbase decided to soft-launch its OTC product with Cheddar and asset management companies. It wanted to get it right before it became the industry standard. So, it soft-launched the product to attract more investors.