The crypto market is one that is extremely vast incorporating a list of different kinds of assets for the public to trade. While the majority of crypto merchants prefer to trade traditionally, others often decide to go for OTC market trading, especially when dealing with high volumes. For short, OTC crypto trading refers to a private trading market for buying or selling crypto, however, it possesses some intricacies you need to know before diving in.
So, what is crypto OTC trading? How can you buy crypto assets on the OTC market? What are the risks involved in this marketplace? These are some of the most important questions to ask before opting for OTC trading and we’ve answered them to the fullest in this article.
Let’s take you on a ride!
Understanding Over-the-Counter (OTC) trading
OTC, short for over-the-counter, is the technique of trading assets through a broker-dealer network rather than on a centralized exchange. It occurs directly between two parties in a closed trading market.
OTC trading markets generally maintain a network for investors and sellers. In an attempt to satisfy their customers, traders are constantly searching for sellers and buyers willing to trade at fair prices. As soon as a buyer or seller places an order, the OTC trader ensures they seek the right party to complete the requested transaction.
Crypto OTC does not operate with open prices compared to a traditional exchange. Instead, only the parties involved have the private prices and can proceed to negotiate based on the amount each party is interested in buying or selling. For OTC crypto trading to work, on one hand, there has to be a party willing to sell assets at a specific price, while the other party is willing to buy at a specified price.
For the transaction to be successful, both parties have to agree on the trade price or condition. Trades on OTC can be direct crypto-to-crypto swaps (e.g. Bitcoin for CELO), or fiat-to-crypto swaps (e.g. USDT to Ethereum). OTC trading platforms exist to connect the buyer and seller and effect the transaction.
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Why are crypto OTC trading desks important?
Crypto OTC trading desks mostly come into play when trading high-volume crypto. This is why it is mostly patronised by hedge fund managers, institutions or high-volume traders. Contrary to popular belief, buying or selling large crypto amounts is a serious challenge faced by crypto traders. Take for example, if you wish to buy 1000 ETH or BTC, it will be near impossible to get all of it from a single seller. Also, purchasing it from a single seller means you will need to fulfil a large number of orders on an exchange, giving room for market volatility to influence the price and you end up not getting all the assets at the same price.
OTC trading solves this problem by helping you buy a large volume of crypto without stress on a single order.
What are the types of OTC securities?
Beyond crypto, there are other securities traded over the counter. The most popular types include:
1. Stocks
The equities that are usually traded via OTC are small companies restricted by the $295,000 price to be listed on the NYSE and up to about $75,000 to be listed on Nasdaq. Some prominent large companies are also listed on the OTC exchange markets, such as BASF SE, Allianz SE, Roche Holding Ag, as well as Danone SA.
2. Bonds
Bonds are not traded on a formal exchange, however, banks still market them via broker-dealer networks. They are also regarded as OTC securities.
3. ADRs
ADRs, short for American Depositary Receipts, are often called ADSs or bank certificates. They generally depict a specific number of shares in a foreign stock.
4. Derivatives
Derivatives are confidential contracts set up by a broker and can serve as forwards, options, futures, or any other agreements whose value depends on any underlying asset, like a stock.
5. Foreign Currency
Foreign currencies are also traded on the Forex, which is an over-the-counter currency exchange. Today, over $6.6 trillion worth of various countries’ money trade daily on the Forex,
6. Cryptocurrency
Cryptocurrencies, such as Bitcoin and Ethereum, are actively traded on the over-the-counter market. The OTC market supports crypto.
Principal OTC trading Vs Agency OTC trading markets
Principal and Agency trading are the two major types of OTC markets today. Although achieving the same purpose, they go about it differently. With Principal OTC trading desks, the assets are purchased upon request by customers. Therefore, this means that the trader assumes the risk on behalf of customers.
For instance, you can place a customer request on the primary OTC desk. In doing so, available market traders will respond with a price based on immediate market rates and conditions. You can decide to negotiate, accept or decline the offer. Upon mutual agreement by both parties, the OTC trading market commits to deliver the assets to you via a legal agreement signed during onboarding.
The principal OTC trading market provider proceeds to search for the requested assets assuming the risk of the market spiking higher before they are able to meet the request. After purchasing the requested assets, the OTC trader sends you instructions on how to make payment for the assets and only delivers them to you after payment is made.
On the other hand, agency OTC trading markets do not assume customer risk or trade with their own funds. Instead, you will need to fund your account and indicate a price range in which you are willing to buy the assets. The agency will then attempt to buy assets with your funds at an agreed price. Note that with this type of OTC trading, the customer will need to pay a service fee to the agency, authorizing it to act as a middleman.
With Agency OTC trading, the risk falls on the customer and not the desk as asset prices may increase before the purchase is completed. The customer will be requested to make an update accordingly.
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What are the advantages of trading with an OTC market desk?
Basically, OTC market trading offers the following advantages:
- Liquidity – purchasing assets through an OTC minimizes the risk of price spikes during purchases as they can sell or buy large amounts of cryptos
- Privacy – OTC trading offers top-notch confidentiality due to how they work, offering little chance of a third party to come in between or know who they are.
- Direct trading – OTC markets allow both parties to make direct trade without restrictions or a third party. This minimises scams as buyers can trace their sellers.
Ultimately, a crypto over-the-counter (OTC)market is a type of market where crypto securities are actively traded via a broker-dealer network rather than on an actual exchange. Usually, this kind of trading is not centralized and happens between two parties, just like a regular trade that is done between two people that buy and sell.
Depending on the volume of transactions you wish to complete, opting for a Principal or Agency OTC trading desk may be more suitable for your needs.
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