Exchanges are the most popular way to dispose of bitcoin holdings for fiat currency, with thousands of coins being traded daily. However, when one cryptocurrency startup founder needed to cash in his bitcoin quickly, he didn’t log on to an exchange to do it.
Instead, the entrepreneur started asking around for a broker who could settle the issue with an over-the-counter (OTC) trade. The broker he found, through mutual friends, was Jonathan ‘Jonny’ Harrison, who runs London bitcoin ATM firm Satoshipoint. The two struck up a conversation on Skype and soon agreed to do a deal.
“Someone told me that he wanted to sell 12 grand-worth, we had a chat on Skype and entered an agreement, and so that was the deal done,” Harrison said, recounting the trade.
Harrison charges a 5% fee for an OTC trade. Although he says he arranges such trades only occasionally, other brokers specialising in OTC trades have found a lucrative niche in the market. As the bitcoin price surged last year, wealthy holders eschewed exchanges and turned to brokers to lock in their gains with a single big trade.
Tricks of the OTC tradeTrading over the counter offers several advantages over placing an order on an exchange. For one thing, traders get to protect their capital from the effects of price slippage.
Slippage is what can happen when an investor sells a large block of coins on an exchange all at once. If the sell order is large enough, it can cause the price on the exchange to fall as it is filled. As a result, the seller can lose a substantial chunk of the proceeds by the time the entire order is filled.
Just how much of a trade is lost to slippage is difficult to quantify, according to George Samman, a co-founder of BTC.SX and a former portfolio manager at a New York investment firm. In a hypothetical trade where an investor sold 100 BTC on BitStamp at today’s price of about $490, he or she would stand to lose up to 10% to slippage.
“When someone is trying to put a block trade through and there’s not enough takers at a certain price level, then the price keeps dropping as bids keep getting lower and lower,” he said.
Other factors can come into play. Traders could be laying in wait with ‘false’ orders on the exchange to feel for large blocks coming to market. When some of those orders are filled, savvy traders could cancel the rest of their original orders, sensing that a big block is being traded, and quickly place new orders at lower prices, Samman says.
“Other traders will just snap it away and the price could drop $10, $15, off of 20 coins being traded in a 100-coin block. And they will keep snapping it up because it keeps slipping and slipping,” said Samman.
Trust in a trustless environmentSpeed and privacy are the other advantages that OTC block trades offer. Sellers needing fiat currency in a hurry might turn to a broker, as would investors who prefer not to entrust their trading data with a large exchange.
In an ironic inversion of bitcoin’s trustless protocol, OTC trades are a throwback to markets operated by trusted intermediaries. Mark Lamb, chief executive at London-based exchange Coinfloor, who regularly conducts large OTC trades for clients, charging a fee of up to 1% of the traded amount, said:
“What you’re selling is trust. This OTC broker knows what they’re doing, vets the participants and knows the participants are going to settle and the trade is going to go through.”
When a call comes in to sell a block of coins, Lamb hits his address book to look for buyers. When a match is found, Coinfloor draws up contracts between itself and each party. The buyer and seller deal with Coinfloor, not each other. After the contract is signed, both parties must transfer their funds to Coinfloor immediately. Once the broker has received the funds from both sides, the assets are then sent to the appropriate counterparty.
While most of the OTC brokers for big blocks CoinDesk spoke to keep identification documents to comply with know-your-customer rules, OTC traders may believe that they enjoy a greater degree of privacy with their brokers.
“Customers want to do trade with someone they can trust; someone they trust more than an exchange. They might come to a broker because they may not trust the top few exchanges,” Lamb said.
....
http://www.coindesk.com/bitcoin-brokers-trade-millions-without-exchange/
Show Posts
