Over-the-counter, or OTC, trading refers to any trading that is not done via an automated exchange. What exactly is OTC trading? Who does it, and why?
Over-the-counter, or OTC, trading refers to any trading that is not done via an automated exchange. What exactly is OTC trading? Who does it, and why? To learn more about what an OTC desk is and how these “under the radar” exchanges operate, Magazine spoke to a few insiders to get the scoop.
The most popular conception of OTC trading revolves around massive off-market deals, like when companies such as MicroStrategy make multimillion-dollar purchases using OTC desks run by the likes of Coinbase or Kraken.
OTC trading is, however, not the exclusive domain of the rich, as it can also refer to peer-to-peer platforms like LocalBitcoins, which has been helping individuals trade BTC both in-person and via bank transfer since 2013. Even some crypto ATMs can be categorized as OTC trading, as these transactions do not always clear on an exchange. In between these two are medium-sized regional OTC desks, which facilitate purchases and sales of crypto by both individuals and companies.
Going over-the-counter
Why do people seek out OTC deals in the first place when existing exchanges like Binance and Coinbase offer easy fiat on-ramps?
Amin Rad, CEO of Dubai-based OTC broker Crypto Desk, explains that this way of trading offers advantages for some people. He says there are only “a few ways of converting fiat currency into cryptocurrency,” highlighting three:
1. Credit and debit cards are a popular way for new users to purchase cryptocurrency via an exchange, but they come with high fees of up to 10%. However, many banks and credit card issuers still consider such transactions suspicious, locking or even closing accounts after learning the nature of the transactions. On the exchange side of things, the credit cards of certain countries — including Russia, Kazakhstan and Ukraine — are automatically rejected. “A further limitation is that users cannot sell crypto in this way, only buy it,” Rad adds, as it is usually impossible to “withdraw” money onto a credit card.
2. “The second channel is purchasing through bank transfer,” he says, which involves sending fiat to an exchange’s bank account. Rad considers this problematic because many banks, in some countries more than others, don’t want to be associated with cryptocurrency nor have their clients trade it. “If you want to do a bank transfer, 99% of the time you will have to lie to the bank because otherwise, they will close the account,” he says, with his views likely most applicable to his own region, the United Arab Emirates. [Editor’s note: Don’t lie to your bank lest you end up like Peter McCormack.]
Banks that do tolerate transfers to cryptocurrency exchanges may still involve their compliance teams to ask detailed questions regarding the exact destination of funds and the reasoning behind crypto purchases. And when transfers do go through, they can take several days. Someone might try to wire money to an exchange on Monday to buy BTC at $30,000, only to watch it rise to $40,000 before the money arrives on Thursday.
3. OTC is the third method, allowing buyers and sellers to exchange directly or via a trading desk such as the one Rad operates. No credit cards are involved, and banks cannot easily determine that the funds sent to them are destined to be used for cryptocurrency. With immediate confirmations of receipt, there is no need to wait around for days and potentially miss an opportunity.
“A big driver of OTC is that it allows a buyer to deal with larger amounts of cryptocurrencies, such as 100 BTC from one seller at one agreed price, as compared with buying over an exchange,” explains Jerry Tan, OTC payments manager at Singapore-based exchange XT, which operates an OTC desk.
From the perspective of whales, such as funds that deal in large sums of cryptocurrency, OTC desks are valuable due to their ability to conduct large trades without moving the market against them. This effect is known as “slippage” and occurs when large-scale buying causes prices to immediately rise before the targeted amount of cryptocurrency has been purchased, while selling causes it to fall before it’s all sold.
“Odds are that a single seller in the order book is not able to transact such a large amount as 100 BTC. Hence, you will need to buy from multiple sellers at higher prices. This is where slippage from your initial desired price occurs.”
Despite the many reasons to engage with OTC trading, there are risks, according to Victor Olmo, fund partner at NewTribe Capital. “One of the most significant is counterparty risk — the possibility of the other party’s default before the fulfillment or expiration of a contract,” he explains. Scams are another common pitfall, many of which were described in a recent Journeys in Blockchain article profiling Rad and his Crypto Desk OTC exchange.
cointelegraph.com