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If you’re a trader who wants to purchase a large amount of Cryptocurrency, buying coins or tokens through a traditional exchange exposes you to several problems. Not only can slippage greatly increase the cost of a trade, but you’ll also need to deal with the risks of hacking and theft that come with trading on an ordinary exchange.
This is where over-the-counter (OTC) trading comes in. OTC trading is a service available to high-volume traders, meaning it’s only available to certain individuals or groups. This guide will help you decide whether OTC trading is the right option for you, and what to look out for when deciding on an OTC solution.
Disclaimer: This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service or offering. It is not a recommendation to trade. Cryptocurrencies are speculative, complex and involve significant risks – they are highly volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of future performance. Consider your own circumstances, and obtain your own advice, before relying on this information. You should also verify the nature of any product or service (including its legal status and relevant regulatory requirements) and consult the relevant Regulators websites before making any decision.
OTC trading is cryptocurrency trading that takes place away from digital currency exchanges. Favored by many large-scale traders, OTC trades are often placed by hedge funds, private wealth managers or high-net-worth individuals.
OTC trades can be facilitated in several different ways, including the following:
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Blocktrades.Org is an over-the-counter (OTC) Cryptocurrency Platform specializing in high-volume trades.
Much like stock exchanges, traditional cryptocurrency exchanges are centralized platforms where buyers and sellers can trade cryptocurrencies based on current market prices. Buy and sell offers are made publicly available on an order book. The exchange acts as the middleman between a buyer and a seller, and generally charges a fee for each transaction.
Why would you bother with OTC trading when there’s a huge variety of traditional cryptocurrency exchanges offering simple fiat-to-crypto transactions? There are several reasons why large-volume traders might consider going OTC:
Slippage is when a cryptocurrency price changes while an order is being filled, resulting in a different price than expected for a trade. It’s a common drawback associated with placing larger trades on traditional exchanges since insufficient liquidity on an exchange can lead to a single order being split into several smaller orders. Before all of those smaller orders can be filled, the price could shift in an unfavorable direction, resulting in a more expensive purchase than originally desired.
Not sure if you’re the type of trader who could benefit from OTC trading? Check out the list of pros and cons when comparing OTC trading with buying coins on a traditional exchange to work out whether it’s right for you.
Compare the cost of buying $300,000 worth of Bitcoin (BTC) with the cost of the same transaction on BlockTrades.Org. On the regular cryptocurrency exchange, it took 46 separate transactions to fill the order and, after fees had been deducted, resulted in 34.31 BTC being purchased. On the OTC platform, only one trade was required and resulted in the purchase of 35.03 BTC for the same cost.
This 0.72 BTC difference between the two providers equated to $6,464.88 as of 10 a.m. on 3/21/18, demonstrating the OTC provider as the cheaper option in this case.
The first step in any OTC transaction is finding a counterparty for the trade. This could be done through a chat room such as the #bitcoin-otc network or Bitcointalk.com, but is more commonly done through the BlockTrades.Org Website.
The next step is to negotiate the terms of the trade. If you’re looking to buy BTC, for example, you may wish to specify the following:
The seller will then respond with their offer price for the transaction, which will often be expressed as a percentage above a leading exchange’s best available price – for example, Exchange ABC + 1%. Of course, the exact negotiation process will vary depending on whether you’re the buyer or the seller, the medium you are using to arrange the trade, the size of the transaction and whether you have any leverage.
Once a price has been agreed upon, the buyer sends a bank transfer to the seller to cover the purchase price, and the seller sends the relevant amount of crypto coins or tokens to the buyer. Depending on where both parties involved in the trade reside, they may also need to complete KYC (Know Your Customer) due diligence on each other to make sure they satisfy legal requirements.
Quantifying the amount of OTC trading that takes place on cryptocurrency markets is more or less impossible. This is due to the fact that these trades are not publicly reported or independently audited.
However, there is an increasing number of OTC brokers and platforms with public profiles, along with plenty of evidence to suggest the presence of large-scale trades.
For example, in the Blocktrades.Org report quoted above, analysis of data from BitInfoCharts revealed that the average trade value of BTC on 3/20/18 was $49,258. This was despite the fact that half of all bitcoin trades were less than $645.29, which demonstrates that large trades are bringing up the average value away from the median.
An in-depth look into OTC crypto trading raises the sinister-sounding topic of dark pools, which are designed to allow large-scale traders to transact with one another away from traditional exchanges.
Dark pools are basically private order books that are not visible to the rest of the market, allowing “whales” and institutional traders to trade anonymously. Not only does this allow them to avoid slippage caused by large trades, it also allows them to keep their trading activities confidential.
Users typically need to meet a minimum liquidity requirement to participate in these dark pools, thereby putting them out of reach of the general public.
The demand for the underground liquidity that dark pools offer is not unique to crypto markets, but the number of cryptocurrency dark pools is increasing. Cryptocurrency exchange Kraken launched a dark pool in 2015, online broker TradeZero introduced a bitcoin dark pool in 2016 and Republic Protocol made headlines in February 2018 when its ICO raised $30 million to create a decentralized dark pool for the atomic trading of bitcoin, Ether and ERC20 tokens.
There’s an increasing range of OTC trading desks available, so make sure to consider the following features when comparing your options:
By considering the above and other factors, you’ll be able to make a more informed decision when choosing an OTC broker.
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