Over-the-counter trading is one of the crypto trading methods changing the games for investors and traders today. Unlike traditional crypto exchanges, OTC trading occurs directly between the buyer and the seller, often facilitated by brokers or specialized platforms. This method has become more common among traders who want large transactions while maintaining privacy.
In this article, we delve deep into this alternative method for exchanging cryptos, how crypto OTC works, and everything else you need to know to get started.
What is Crypto OTC Trading?
Over-the-counter (OTC) trading is a decentralized method of buying and selling cryptos directly between two parties, without going through the crypto open market.
Unlike exchange-based trading, OTC trading is usually conducted off the public order books which makes it more privacy-friendly.
The main distinction between traditional crypto exchanges and OTC services is the personalized and private nature of the transaction. These services assist large traders, institutional investors, and high-net-worth individuals looking to execute significant transactions outside the regular market.
How Does Crypto OTC Trading Work?
Over-the-counter (OTC) trading involves direct negotiations between crypto buyers and sellers enabled by an OTC trading desk. Let’s look at how this type of transaction works:
Initiating the Deal
An OTC transaction typically begins with the initiation of a deal. In this phase, the buyer and seller who wishes to trade a large amount of cryptos off the open market notifies the broker.
The broker then taps into their extensive network to identify potential buyers or sellers. Upon finding one, they negotiate on behalf of the client to help secure a favorable deal for both sides. An example of a broker for this kind of transaction is an Independent Reserve. Although this platform is a traditional crypto exchange service, it also offers OTC transaction services.
Agreement and Confirmation
Once the negotiation is done and terms are agreed upon, a binding agreement is then reached to protect both parties during the transactions.
Settlement
The next step of the OTC transaction is for the agreed-upon assets to be transferred between the buyer’s and seller’s wallets. It is the job of the broker or OTC desk to ensure that this settlement process is secured.
Reporting and Documentation
Once the transaction has taken place, the broker then provides the necessary documentation about the trade. The purpose of this documentation is to foster transparency and help in record-keeping for both parties.
Benefits of Crypto OTC Trading
Over-the-counter crypto trading has so many benefits for investors and traders alike, let’s look at some of them:
Reduced Impact on Market Prices
OTC trades often involve large volumes, and executing them on traditional exchanges can massively impact the price of the crypto market resulting in what is known as price slippage. When these large transactions are done over the counter, it doesn’t cause substantial market movements.
Increased Privacy
For investors who prioritize privacy, OTC transactions provide a higher level of privacy compared to public exchanges. The parties involved in this transaction can negotiate and execute trades without exposing details on a public order book. This is a publicly accessible ledger that displays a list of buy and sell orders for a particular asset, such as Bitcoin or Ethereum in real-time.
Tailored Solutions for Institutional Investors
OTC trading caters to institutional investors and as such, offers personalized solutions to meet their specific trading needs. These special services may include customized pricing, settlement options, and strategic guidance.
Minimized Counterparty Risk
Since over-the-counter transactions are facilitated by brokers or trading desks who act as intermediaries, the counterparty risk is reduced. The involvement of these platforms ensures the legitimacy and financial capability of the involved parties.
Flexibility in Settlement Terms
Another advantage of OTC trading is the flexibility in settlement terms. This type of transaction allows parties to negotiate and agree on terms that best suit their preferences and risk profiles.
Disadvantages of OTC Trading
While Over-The-Counter trading has various advantages, it also comes with some challenges. Let’s look at some of them:
Limited Price Transparency
OTC transactions often lack the same level of transparency as traditional exchanges. The prices for these transactions may not be available to the public, which makes it hard for participants to gauge market conditions beforehand.
Lack of Regulatory Oversight
OTC markets usually operate with less regulatory oversight compared to formal exchanges. This means they are subject to less stringent regulatory scrutiny compared to that of traditional crypto exchanges. This can expose participants to higher risks, including fraudulent activities and market manipulation.
Dependency on Brokers
Since over-the-counter transactions often involve the use of brokers or intermediaries, it could result in dependency on these platforms. While these entities introduce an additional layer of trust, it may also lead to conflicts of interest, as brokers may have their own agendas.
Factors to Consider Before Choosing an OTC Trading Service
Now that you understand what OTC trading entails, you must consider certain factors before opting for an over-the-counter service. Here are some of the things to look out for:
Reputation and Reviews
Before using an OTC service, ensure that you check out what people are saying about them. Look for reviews and testimonials from other users who have used the services in question. Some good places to start are online forums like Reddit or Discord groups, social media, and review websites.
Security Measures
You’d want to prioritize platforms with robust security measures. This includes secure storage of assets, two-factor authentication, and adherence to compliance standards. If you are using a traditional exchange that also offers OTC services, ensure that the platform has no history of security breaches.
Transaction Transparency
A reputable Over-the-Counter service should provide clear and transparent information about transaction processes, fees, and terms. Hidden fees or unclear processes could be red flags.
Is OTC Trading for You?
If you are new to the crypto scene or just testing the crypto investment waters, OTC trading may not be for you. It is a tailored transaction for institutional investors, large-scale traders, and crypto reserves, who make large crypto transactions. If you fall into any of these categories, ensure that you implement the security measures above as you choose the platform for your transactions.