Crypto OTC Trading, Explained

Generally speaking, over-the-counter (OTC) trading is a deal that happens directly between two interested parties — that is, without the supervision of exchanges.

OTC deals involve a wide range of assets — from commodities to financial instruments like stocks and derivatives. Unlike traditional exchanges, the OTC market is decentralized and has no physical location, and trading is done via dealer networks. Traders are not necessarily involved in the process directly, as they can seek assistance of middlemen, like brokers, or OTC desks.

OTC desks are mostly trading securities that are unlisted on a formal exchange due to various reasons. Often, smaller companies are unable to comply with the listing requirements of formal exchanges or pay the fees required by the big industry players. That’s where OTC trading comes into play.

This market brings not only the risks that counterparties face during the direct deal, but also freedom and opportunities, which is why OTC trading has become increasingly popular among qualified investors, traders and even commercial giants. For instance, Nestle, Bayer, Danone SA and some other major companies are trading their shares on OTCQX, the top tier of the three marketplaces for trading OTC stocks.

With regard to the cryptocurrency industry, OTC desks have gained popularity among those who are willing to sell large amounts of coins, like miners or early crypto investors. On the other hand, there are plenty of investors — including high-profile ones — willing to buy crypto without resorting to major exchanges.

The OTC market is considered particularly promising by crypto investors. Perhaps this is why major companies such as Binance, Coinbase and Circle kept opening their own OTC desks right in the midst of the crypto winter, when the rates of bitcoin and major altcoins were far from optimistic.

According to some estimates, crypto OTC trading currently has larger daily volumes than the major exchanges. For instance, investigators from Digital Assets Research and TABB Group found out that the OTC market facilitated $250 million to $30 billion in trades per day in April 2018, while the exchanges handled about $15 billion in daily trades during the same period.

Crypto miners who sell their profits represent a significant segment of OTC market sellers, while hedge funds and institutional investors are among the buyers.

In October 2018, Cumberland OTC desk, the Chicago-based crypto trading unit of DRW Holdings LLC, revealed that most of its deals took place during Asian working hours. The experts then told Bloomberg it might be a sign that Asia-based miners, such as Bitmain’s Antpool and BTC.com, were liquidating their coins via OTC trading.

However, the OTC market is obviously far from being dependant on miners. According to an investigation performed by Reuters, this type of trading also involves wealthy investors, payment processors and, increasingly, hedge funds. As per 2018, the notable players on this market were men in their mid-20s or early 30s. The trades were mostly performed via online messaging services like Telegram or Skype, through brokers or on specialized OTC desks.

Incidentally, some experts believe that institutional investors, who are expected to drive crypto industry to mass adoption, are widely interested in buying crypto outside large exchanges. This statement has partly been corroborated by the recent news about the top 100 crypto companies — such as Huobi, Coinbase and Bithumb — launching their own OTC desks exclusively for institutional clients.

To sum up, everyone who wants to buy or sell large amounts of crypto without excessive regulation (and sometimes on better terms) applies to OTC trading or intermediaries working in the sphere.

If you are seeking higher liquidity, combined with a decent level of anonymity, OTC trading might be an elegant solution for you.

Let’s imagine you are trying to sell a noticeable amount of altcoins you saved from the early crypto years. Most importantly, you would be seeking high liquidity for your assets. The experts agree that major exchanges usually have lower liquidity than what is ideal. This is why you might rather use OTC trading if you are looking to invest more.

The second key goal for a trader is to minimize the impact on the market as a consequence of a large deal. This point is relevant mostly for those who are looking to buy or sell thousands of bitcoins. If you apply to OTC trading, the transaction is performed directly and does not show up in order books, which is why it will not affect the price.

Moreover, if you are investing in a lot of bitcoin or any other crypto asset, you might want to protect your identity and keep the deal anonymous. In this case, skipping the services of major exchanges and purchasing the assets directly from a counterparty is a nice way to avoid unnecessary attention and keep the deal to yourself.

Finally, even if you are quite far from being a bitcoin whale, on regular exchanges, you have to respect certain daily and monthly trading limits. For instance, major United States exchange Coinbase has a $10,000 daily limit for its Pro Users, which can be increased to $25,000. Meanwhile, Malta-based Binance offers a 2 BTC daily limit to all users and a 100 BTC daily limit to those who pass all the necessary Know Your Customer (KYC) procedures. As skillful traders explain, these limits can be increased significantly upon personal request — at this stage, however, it has nothing to do with making an anonymous deal.

The institutional OTC desks launched by crypto giants name an impressive starting sum, but smaller companies and intermediaries have lower thresholds.

Normally, the amounts are quite impressive. Let’s start with the major players, mostly aimed at institutional traders. As Cointelegraph briefly explained in its review dedicated to OTC services in crypto, on the desk founded by the U.S.-based cryptocurrency exchange Bittrex, investors are obliged to commit to trades of $250,000 or more. Another U.S. exchange, Poloniex, has exactly the same threshold for traders.

Binance, the Malta-based crypto exchange previously mentioned in terms of daily limits, insists that only transactions that are larger than 20 BTC (around $175,000 at press time) will be carried out over its OTC. Meanwhile, on the U.S. exchange Coinbase, only selected users of Coinbase Prime, a service specifically tailored to institutional investors, can use the OTC trading feature.

However, the atmosphere of OTC trading in smaller companies and in specialized private chat rooms is much more relaxed. For example, Changelly, a noncustodial instant cryptocurrency exchange that has recently launched its own OTC service, sets the limit of 10 BTC ($86,000) to start trading. And in some Telegram chats, you can set a deal directly with a person who needs the same amount of crypto you want to sell.

If you are okay with KYC and AML policies, you could start trading at OTC desks launched by crypto exchanges. For a higher level of anonymity, choose smaller companies or private deals.

To start trading, you first of all have to decide whether you are ready to comply with KYC procedures and provide your sensitive private data to the intermediary. As we explained before, on the desks operated by Coinbase, Binance and other major exchanges, you will likely be obliged to do so.

The process of becoming an OTC deal participant at smaller services is much more simple. For instance, at Changelly, the customer only needs to provide a working email, a convenient messenger for further communication with a broker assistant, and to provide a username via the application form placed on the OTC online desk.

Moreover, if you are working with broker assistants or other counterparties, you have to carefully examine the fees charged for each transaction. For instance, it might be flat or, on the contrary, might vary based on the size of the trade.

Security and the type of storage that the OTC desk uses are also important. It is crucial to find out whether your service is providing insurance to traders or not. It would also be useful to have a personalized assistant available in your time zone, who could answer your questions and help with the deal in case of any troubles.

Finally, do not forget to check reviews on trusted sources. If you are working with the assistant, it is crucial to find out how long he or she has been in business. You can also Google whether he or she specializes solely on OTC trading or also offers other services.

As well as in any other type of trading, you should be worried about scammers and settlement risks. That’s why you have to do preliminary research before trading.

The sources of the large crypto amounts can sometimes be quite murky. As an anonymous trader told Reuters, OTC trading sees spikes of activity when a big hack happens. So, when you trade anonymously, you always have to be careful with the trader on the other side and beware of suspicious transactions.

The forums and topics on Reddit are full of sad stories about scammers taking advantage of naive traders, providing fake videos of the amounts they have, making false agreements or using other phishing techniques. In particular, there are many warnings about fraudsters on LocalBitcoins. However, in most cases, fraud can be prevented by simply canceling any deal that seems shady or by applying to a skillful intermediary.

Moreover, most OTC brokers do not yet provide a trusted custody solution, which would mitigate settlement and operational risk. It is for this reason that many traders use escrow services or bank transactions to be able to return the money if the deal fails.

As the OTC market evolves, companies are working on building trusted custodial solutions and risk management systems.

The OTC market is expected to continue steadily growing, and the financial insiders are exploring new ways to make these deals more secure so that institutional investors might be more involved in crypto.

For instance, Fidelity, the world’s fifth-largest asset manager, is developing a cold storage to hold the assets from large over-the-counter crypto trading firms. Meanwhile, Coinbase has integrated its custody service with its own OTC desk, which enables customers to use the OTC desk to price and confirm trades prior to moving funds.