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OTC Trading Explained

Jun 16, 2020

What is OTC trading

First, let’s define what OTC means. OTC stands for Over-The-Counter. In other words, the sale is performed outside of an exchange. Such trade is carried out directly between the client and the market maker. The transaction is performed without the help of third parties, between the seller and the buyer.

Large market players and organizations are involved in OTC trading. A huge number of deals are made using this method of trading. The market for OTC transactions is not locally tied to a specific place and generally decentralized.

Why do we need OTC trading?

OTC markets are one of the most important components of the cryptocurrency trading space. Digital assets still represent a very young and small market, which often leads to liquidity problems. High-income individuals cannot buy large amounts of cryptocurrency without a significant change in the price of an asset.

To perform a large transaction on a common exchange you usually need to make a number of small transactions. The rate of each deal may vary. Price fluctuations are common in the cryptocurrency market and can significantly increase trading costs and harm market participants.

During OTC-trading, customers are limited to one big deal. In addition, the transaction is not recorded in the order book of the site and is not displayed publicly, which allows traders to achieve a higher level of anonymity.

Advantages of OTC trading

Lack of restrictions. The OTC market has a high entry threshold for traders, and, as a result, there are none of the traditional restrictions that are common on usual exchanges. At one time, a holder can exchange cryptocurrency for the maximum amount that the broker himself has or offers.

High level of security and transparency. The exchange of large sums of money requires appropriate security measures. OTC brokers must comply with the requirements of the KYC and AML policies in order to prevent money laundering and criminal activities.

High liquidity. The OTC market provides opportunities to purchase digital assets for a large amount at one price and in one order.

The ability to purchase cryptocurrencies for fiat directly. Many cryptocurrency exchanges do not provide the opportunity to buy cryptocurrency for fiat, or offer a limited selection of fiat currencies.

Cons of OTC Trading

There is no way to buy or sell cryptocurrency quickly. For large transactions, it will take some time to search for a counterparty. In some cases, it may turn out that some brokers are not able to deliver the necessary amount of the assets, and in others, the trader doesn’t have enough money to purchase. Placing large orders on exchanges to buy or sell will take a lot of time. Or you will have to distribute funds on several exchanges, which can be inconvenient.

There is only a small selection of cryptocurrencies that you can purchase in large amounts. Today, only 12 cryptocurrencies have a capitalization of more than $1 billion. Suppliers simply will not be able to provide the necessary amount of funds for transactions for every cryptocurrency. They are limited to only Bitcoin, Ethereum, Ripple, Bitcoin Cash and Litecoin.

OTC-trading is suitable only for long-term investments, since it’s not feasible to quickly find buyers and sellers for a large number of transactions in order to make a profit. In addition, in most cases, it is not possible to automate the trading process as you can on a lot of crypto exchanges.

Where to find sellers and buyers

There are special private and open group chats on Telegram and other platforms where you can search for sellers and buyers. When looking for sellers and buyers one should be extremely vigilant, and only choose people who have a good reputation. Thorough preliminary analysis and research is necessary before making a deal or negotiating.

OTC brokers

Brokers act as an intermediary between the parties of a transaction; they work on finding suitable offers. They have their own websites and portals. Here are 5 popular OTC brokers:

Circle Trade – one of the biggest OTC platforms which offers services for institutional traders. In general, the volume of one transaction is $1 million, while some transactions exceed $100 million.
Genesis Trading – one of the first trading platforms for digital assets. The minimal sum of trading is $75,000. The platform offers the purchase of 7 cryptocurrencies: Bitcoin, Bitcoin Cash, Ethereum, XRP, Litceoin, Ethereum Classic and Zcash.
XBTO – a broker positioned as a world leader in the crypto industry. The exchange has been supplying liquidity to institutional investors and trading platforms since 2015. In addition to trading, the exchange provides money management, crypto-mining services and invests in blockchain startups.
B2C2 – a London OTC service. This is one of the few over-the-counter exchanges that provide APIs for automated trading. The exchange provides trading for the 6 largest cryptocurrencies in pairs with the dollar, euro, pound sterling, Australian and Canadian dollars and many others.
SFOX – a San Francisco-based exchange with more than 20 liquidity providers. The platform seeks to provide a single access point to the cryptocurrency market for institutional traders.
Localbitcoins – perhaps the most popular resource for making such transactions. It serves as a platform that allows you to search for suitable offers. In addition it provides an escrow system to avoid scamming.
OTC via traditional crypto exchanges – many centralized cryptocurrency exchanges provide OTC transaction services for their customers. The following four trading platforms are a good example: HitBTC, Bittrex, Poloniex and Huobi.

Major Risks in OTC trading

The greatest risk of OTC trading is related to the safety of your funds. The cryptocurrency sphere is still something of a “wild west,” in which scammers look to profit off of inexperienced naive traders. In this space it is much easier to lose all your funds than to start earning money. Do not contact dubious individuals or websites, and refuse transactions if you are not sure that the offer is honest.

There is another risk related to price setting, which works differently with OTC than it does with common exchanges. You can get a good discount making a deal over the counter. However, a shortage of offers can cause the opposite effect, and, on the contrary, you may have to overpay by a few percentages of the market value to complete a transaction.

If you decide to use the OTC services of popular exchanges like Poloniex or HitBTC, be ready to play according to the strict rules of the platform. For example, the minimum size of an OTC transaction on the trading desk of the Poloniex and Bittrex exchanges is 250,000 USD. The popular Binance exchange has very similar rules, but, due to its focus on cryptocurrency, the minimum transaction amount there is 20 Bitcoins.

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