When you hear of Blockchain, what’s the first thing that comes to mind? Cryptocurrencies? I know I guessed right! Don’t be alarmed, I’m not a mind reader. Cryptocurrencies have generated a lot of Buzz over the years and that isn’t about to change.
There’s more to the use of Blockchain and its impact across many verticals has not gone unnoticed. Even at that, we are not done harnessing the potentials of the blockchain. And there is still so much that the future will bring.
Here are some of the Blockchain trends that you should expect to manifest in the nearest future.
OTC trading is cryptocurrency trading that takes place outside of digital currency exchanges. It happens directly between the two involved parties. Since crypto exchanges are not directly involved in this trade, the parties can independently agree on their own price (usually a similar price to current market prices) and transfer the cryptocurrency between themselves. The information is usually private and only the private parties are usually privy to the prices they traded by.
A trade can be crypto to crypto i.e. swapping bitcoin with altcoins or fiat to crypto (swapping bitcoin for cash and vice versa). Trade occurs between a dedicated trading “desk” and another individual or institution, known as counterparty. Billions of dollars’ worth of crypto change hands every year by means of OTC trading.
OTC trading is not entirely novel, as it does not only exist in the crypto industry, it is also a popular way of exchanging assets in the traditional financial industry. Experts estimate that up to 30% of the entire equities trading volume occurs via OTC. It was fully implemented for cryptocurrencies in 2017 due to the tremendous increase in the use and value of cryptocurrencies.
Buying large amounts of crypto directly could be difficult, a single exchange may not be offering a sale for all the crypto you wish to buy. To purchase your desired volume, you would need to spread your purchase across multiple exchanges, buying in chunks at the best price possible on each exchange. Crypto OTC desks help you source large amounts of crypto in one shot, at a fixed price and without all the difficulties that could come with it. Two types of OTC desks exist; they are the Principal Desk and the Agency Desk.
The principal desk comes from the word “Principal risk”. The principal desk purchases the crypto you wish to buy using their own funds, bearing the principal risk. If the price of crypto spikes up before they are able to source for the total number requested, they would shoulder the loss.
The agency desk, on the other hand, does not trade with its own funds, and as a result, does not bear the market risk. Instead, they act as middlemen to broker a deal on behalf of a counterparty. You fund an account with them and offer a range you are willing to trade for. The agency will then attempt to purchase your required number at an agreed upon price. If the price spikes before your agent is able to complete your order, you would be the one to bear the risk.
There are some notable differences existing between trading with crypto exchanges and trading OTC.
First, Carrying out a large transaction using a cryptocurrency exchange would require making a number of small transactions on different exchanges, until it all adds up to the total volume you wish to exchange. This trade occurs irrespective of any hike in price that occurs in the process of completing your transaction. With OTC trading, you make just one big transaction at a big exchange rate. This allows for more efficiency and less difficulty with execution.
Secondly, Transactions carried out on crypto exchanges reflect on the market and are recorded in order books. OTC transactions, on the other hand, are usually discrete. They are not publicly displayed or recorded in order books. This provides a higher degree of privacy.
Lastly, unlike traditional exchanges, there is no means of accurately estimating OTC market volume. This is because OTC trades are not publicly recorded or audited, they do not influence market price or affect the forces of demand and supply.
Anyone who wants to quickly and easily buy or sell large amounts of crypto can trade crypto OTC. They include but are not limited to hedge funds, institutions, and individuals with high net worth willing to invest in the crypto market.
OTC desks also frequently trade with each other and Miners use OTC desks to convert crypto into their local fiat currencies in order to pay for expenses. Exchanges and organizations that trade in crypto can trade OTC to convert them into fiat currencies. OTC trading can be facilitated through brokers, chat rooms or the use of ATM’s.
OTC trading has some advantages over traditionally trading on exchanges.
First, it eliminates the risk of slippage which are unfavorable price changes that occur before the completion of a transaction. Avoiding the risk of slippage usually results in trade occurring at a better price.
Secondly, numerous traditional exchanges are a target and oftentimes a victim of hacking attacks. OTC trades made through a trusted broker decreases hacking risks associated with crypto exchanges.
Third, it allows for fast settlement of large trades and quicker access to funds compared to exchange-based transactions. Depending on available liquidity, large trades on a traditional exchange might take days to be completed, while processing large trades are much faster with OTC.
It is also a viable choice for ICO’s willing to convert crypto earned from their projects into fiat currency.
Some of the disadvantages include:
First, OTC trade was designed for the transfer of large volumes of cryptocurrencies. This makes it unsuitable for small traders.
Secondly, Counterparty and settlement risks could exist, as sometimes, there is no guarantee that your assets will be delivered. There is also a probability of the other party’s default before the expiration of the contract.
Thirdly, Most OTC brokers provide little or no custody solution, and this can increase counterparty and settlement risks.
Lastly, OTC trading cannot be automated through an API like traditional exchanges.
the emergence of Crypto OTC trading, and it’s increased usage in recent times is proof of the growth of the crypto space as it continues to evolve and come up with more suitable solutions.
What do you think about trading cryptocurrencies over the counter? Let me know your views in the comment section below.
About the Author
Dr. Edson Pindza