What are crypto OTC desks?
What is OTC trading?
Over-The-Counter (OTC) desks are not a novelty within traditional financial markets. It refers to a platform where institutions or individual traders can trade directly. OTC trading can include stocks, bonds and derivatives as well as cryptocurrencies.
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OTC desks assume the role of an intermediary between buyers and sellers, and provide them with liquidity. OTC trading enables large trades that may not be possible or practical to go through on public exchanges.
An OTC trade happens directly between two parties, with one of them typically being a desk or a business dedicated to trading a particular asset class. When conducting OTC trades, two parties agree on a price and work out the transfer between themselves.
What are OTC markets in traditional finance?
There are two main ways of organising financial markets – exchange and OTC trading. The OTC market in a traditional sense means that securities are being traded via a broker-dealer network instead of a centralised exchange such as the New York Stock Exchange.
The OTC marketplace often serves as an alternative for smaller businesses or those companies that don’t want to list or cannot list on traditional exchanges. Typically, listing on a standard exchange can be a time-consuming and expensive process which often turns out to be outside the capabilities of smaller companies.
When it comes to traditional finance, you can think of OTC desks as private banks where users who want to place broad orders can do so in a discreet manner and get them filled rapidly.
What is crypto OTC trading?
Similar to its traditional counterpart, crypto OTC trading services are based on a simple trade of crypto assets directly between two parties in a closed crypto trading market.
In contrast to a cryptocurrency exchange with listed prices, the prices involved in OTC crypto trading have a private price they show and can negotiate deals directly with the other party. For example, imagine two parties negotiating in private.
OTC trading markets as professional platforms deal directly with crypto buyers or sellers. They provide crypto-to-crypto or crypto-to-fiat transactions.
Why do crypto OTC desks exist?
Similar to the reason why OTC desks exist within traditional financial markets, buying and selling broad amounts of crypto assets is not an easy task.
For example, you want to buy 500 BTC; this could be hard to do on a single exchange and you would have to buy it from multiple sellers. It could easily happen that you manage to buy the first chunk at the current market rates, but you could end up buying the last portion at a significantly higher price – this is called slippage.
In simple terms, slippage means you ran out of users willing to sell the cryptocurrency at your desired price. It causes you to slip away from the original market price. To avoid slippage, you have two options – you can spread off your purchase around multiple crypto exchanges or go to an OTC desk.
Slippage can be avoided by using assets with significant trading volumes which means that they are highly liquid. High liquidity is a feature of safe haven assets and assumes an important role in high-volume transactions. If you're interested in whether cryptocurrency is a safe haven asset, why not read this article: 'Safe Haven Assets: Trading on Gold, Bonds and Crypto'.
That is why crypto OTC desks exist – they make it easier to deal with large amounts of crypto.
Therefore, if you are wondering who trades crypto OTC, the answer is anyone interested in purchasing large amounts of crypto assets rapidly.
For example, institutional investors, high-volume crypto traders, high-net-worth individuals, hedge funds, and private wealth managers benefit from cryptocurrency OTC desks’ main perks. Buyers with broad capital bases and the possibility to trade in large volumes with transactions typically ranging from $25,000 to $75,000 typically benefit from cryptocurrency OTC desks as brokers usually set out these transaction limits.
How do crypto OTC desks work?
As explained above, crypto OTC trading services involve transferring cryptocurrency between two crypto traders directly to one other on the open market. This enables both parties to negotiate the prices based on the value of what they want.
Principal desks vs agency desks
There are two types of crypto OTC desks - principal and agency desks.
The first model is the principal desk which stems from the term ‘principal risk’. In other words, principal desks use their funds to purchase assets and assume market risk of the process.
The process starts with requesting a quote through a chat application and waiting for the desk traders’ response. Desk traders respond with a price based on current market conditions, and you can choose to accept, counter, or decline.
If you accept the offer, the principal desk is required to deliver the desired amount based on a legal agreement signed during the onboarding process. The desk then figures out the most optimal manner of sourcing the desired amount.
The second type of OTC desk is an agency desk. Unlike principal desks, agency desks don’t use their funds; therefore, they do not assume risk as the first model. They charge a fee to act as an intermediary as well.
Therefore, if you want to buy large amounts of crypto from an agency desk, you need to fund your account and state a range you are willing to buy the digital assets. The agency desk then attempts to buy the desired amount with your funds. You are assuming risk because the prices could increase before the agent can complete the transaction.
Advantages of using crypto OTC desks
The first benefit is liquidity. It is the main factor associated with the use of OTC trading because crypto exchanges may suffer from low liquidity, especially when it comes to conducting large orders efficiently. As opposed to crypto exchanges, the use of crypto OTC desks means that the amount doesn’t have to be broken down into small chunks which reduces the risk of price volatility.
Secondly, crypto OTC desks enable parties to conduct transactions directly which adds an extra layer of confidentiality. These transactions are typically private, and there are minimal chances that third parties might come between a transaction.
OTC trades involve direct transactions where buyers and sellers are empowered to execute trades without any restrictions. Trading on a regular exchange leaves no room for price negotiation, but on OTC markets, traders can make an order, reject the offer, or counter an OTC desk. Direct transactions also add up to the overall security since scammers might assume the role of third parties.
Are there any drawbacks?
Crypto OTC trading provides a lot of benefits, but it brings to the table particular challenges as well.
OTC traders have to deal with a lack of oversight and transparency in the relevant market. OTC trades are not publicly recorded so it may be hard to verify a transaction.
Secondly, OTC traders face the counterparty default risk. In other words, trading over the counter means that you are dealing with one counterparty that could withdraw from the trade or collapse before the transaction is executed.
Finally, the lack of real-time order books can make it challenging to determine a fair market value of digital assets, along with potential asset price fluctuations within short periods.
Why are OTC trading desks important for the crypto space?
A few years ago, crypto OTC desks didn’t exist, at least with the structure that they have today. Now many OTC desks are operating globally and trading billions of dollars worth of crypto assets. This reflects the growth and expansion of the crypto industry since the inception of Bitcoin.
Crypto OTC trading services are useful for high-net-worth buyers and sellers to trade broad amounts of cryptocurrencies without alerting the market about their transactions.
When it comes to institutional adoption of cryptocurrency, OTC trading assumed a significant role. Those desks that provide a secure and compliant environment enable institutions to access the crypto market easily which adds up to the mainstream adoption of crypto.
Back in January 2024, the U.S. Securities and Exchange Commission approved 11 Bitcoin spot Exchange-Traded Funds (ETFs). If you want to find out whether it could drive crypto adoption, we suggest reading this article: 'Are Bitcoin ETFs the key to the mass adoption of crypto?'.