OTC: A Playground for the ‘Big Boys’

OTC crypto trading is a practice typically adopted by large-scale speculators who handle significant volumes of digital assets. 

What is OTC?

In the world of Over-The-Counter (OTC) trading, buyers and sellers work out the transaction details amongst themselves, establishing price parameters that may also include futures. Unlike traditional exchange transactions, these settlements occur directly between parties without any exchange acting as a middleman.

These types of arrangements generally arise under two conditions:

• when the volume of assets being traded is too massive to list on an exchange;
• or when this transaction's execution via an exchange might significantly alter the asset's market price.

Companies offering this kind of trading can tap into robust liquidity pools that can cater to large-scale investors. This setup allows clients to negotiate deals that suit their interests best without fretting over market volatility.

Furthermore, OTC trading occasionally pulls in banking institutions. TradFi entities have been long involved in the crypto market and are actively trying to edge out younger competitors. They provide dedicated managers who guide clients through every step of the trading process, from account setup to transaction completion. They offer their clients the support and recommendations they need, particularly when trading large cryptocurrency volumes.

Advantages of OTC

Why do significant investors turn to OTC trading? 

It presents several notable advantages:

• virtually limitless liquidity;
• an absence of volatility;
• the ability to conduct transactions at a set price;
• enhanced security due to multi-factor authentication and robust protection against hacking;
• autonomous cold storage for assets;
• insurance coverage;
• transaction loans, which are much gentler than margin trading;
• confidentiality;
• 24/7 professional support;
• regulatory protection, as regulators haven’t yet imposed any significant restrictions on OTC trading.

These comfortable trading conditions are generally out of reach for regular cryptocurrency exchange traders. However, the proprietors of hefty cryptocurrency wallets eagerly seize this opportunity. This is primarily applicable to institutional whales, but can also extend to private digital businesses (like mining pools) and hedge funds.

Most Popular Platforms for OTC Trading

Both crypto exchanges and traditional financial organizations offer platforms for OTC trading. Here are a few examples. 

1. Crypto Com. This OTC portal has been catering to VIP clients for over a year. It used to serve clients from the United States, but under pressure from the Securities and Exchange Commission (SEC), it closed its traditional institutional exchange and filed to open this division in Singapore. The OTC trading remained unaffected by this move. The minimum transaction threshold for OTC trading here is relatively low, at $50,000. For comparison, the now-bankrupt Genesis had this threshold at $250,000.
2. FalconX. This is a specialized platform for cryptocurrency trading for institutional clients. It offers them a wide array of Wall Street-level services, including clearing, lending, and derivatives. It also provides consultants to facilitate transactions, primarily aimed at institutions still familiarizing themselves with the cryptocurrency market. For regular traders, many of the analytic tools offered may be complex. The platform reported a trading turnover of around $280 billion in 2022.
3. Coinbase Prime. Created in 2022, this separate brokerage platform for VIP clients in the Coinbase ecosystem reports a quarterly turnover of over $124 billion. It caters to independent hedge funds, venture capitalists, and private capital managers. The minimum transaction threshold here is $1 million, with a maximum insurance coverage of $320 million. Unique features of this platform include the ability to trade NFTs, a mobile application, and an API for automated trading.

What's the Catch?

However, despite its advantages, OTC trading has a few significant drawbacks. First, the selection of available cryptocurrencies is limited. These platforms keep an eye on SEC actions and block transactions with tokens that could potentially be unregistered securities.

Second, the fees can be high, sometimes reaching up to 5%. For the benefits of security, privacy, and instant settlement, a premium price is required.