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Author Topic: Over the Counter (OTC) Cryptocurrency Trading - Explained in Details.  (Read 572 times)
wwzsocki
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March 26, 2019, 09:47:09 AM
Last edit: May 07, 2019, 09:48:46 AM by wwzsocki
Merited by Halab (2), Haunebu (1), wumBowo (1), r1s2g3 (1), butka (1)
 #1

Over the Counter (OTC) cryptocurrency trading is becoming increasingly popular across the globe. Here’s how it works, who the major players are, and its general pros and cons.

What is an Over-The-Counter Market
A decentralized market, without a central physical location, where market participants trade with one another through various communication modes such as the telephone, email and proprietary electronic trading systems. An over-the-counter (OTC) market and an exchange market are the two basic ways of organizing financial markets. In an OTC market, dealers act as market-makers by quoting prices at which they will buy and sell a security, currency, or other financial products. A trade can be executed between two participants in an OTC market without others being aware of the price at which the transaction was completed. In general, OTC markets are typically less transparent than exchanges and are also subject to fewer regulations.

BREAKING DOWN Over-The-Counter Market
OTC markets are primarily used to trade bonds, currencies, derivatives and structured products. They can also be used to trade equities, with examples such as the OTCQX, OTCQB, and OTC Pink marketplaces.

OTC markets are typically bifurcated into the customer market – where dealers trade with their clients such as corporations and institutions – and the interdealer market, where dealers trade with each other. The price a dealer quotes to a client may very well differ from the price quoted to another dealer, and the bid-ask spread may also be wider in the case of the former than in the latter.

OTC market size
In April 2018, Bloomberg reported that the daily OTC market was anywhere between $250 million and $30 billion per day. This is compared to around $15 billion per day on crypto exchanges.

The volumes being reported to vary wildly. Bravecoin.com reported in April that the daily OTC volumes were three times the size of exchanges2. TABB Group estimated the OTC market to be valued at $12 billion per day, whilst Digital Asset Research quoted $250 million.

What is generally agreed is that daily OTC volumes for cryptocurrency are much larger than exchange-traded volume, but given the market’s opaqueness it’s impossible to be entirely sure. Further confusing things are claims that crypto exchanges have been artificially inflating their disclosed volumes.


Why use an OTC broker (and not a crypto exchange)?
• Lack of liquidity - Crypto exchanges have low liquidity in their order books. OTC desks are good for pushing through large trade orders searching for market liquidity.
• Price protection, Anonymity - OTC is good for moving large orders which avoids impacting the price, e.g. 1,000 BTC. Order depth will not show up like it does on an exchange.
• No fiat onramp - few crypto exchanges have a fiat onramp (though Binance is working on it and already have some solutions in place in Asia).
• Avoid price ‘slippage’ - price slippage occurs on exchanges when the executed price is different to the expected price.
• Avoid prohibitive crypto exchange limits - The majority of crypto exchanges have prohibitive trading limits. For example, Coinbase limits purchases to $25,000 per day. Kraken only lets you withdraw $2,500 per day and $20,000 per month. Circle imposes a withdrawal limit of $3,000 per week.


Who are the main buyers and sellers?
At the moment, the main buyers are hedge funds and the main sellers are miners. In Oct 2018, it was reported in Reddit Rumours that hedge funds were buying large volumes from miners.

The main participants trading crypto OTC are:
• Hedge funds, smaller asset managers, family offices (buyers).
• Miners (sellers).
• Regulated broker-dealers (on account).
• Crypto exchange OTC desks (on account).


Which geographies are driving the majority of OTC trading?
• Asia
• North America

It was reported in October 2018 that 33 percent of Cumberland Mining’s OTC trades were processed during Asian hours, suggesting that large miners such as Bitmain’s Antpool and BTC.com are regularly liquidating Bitcoin generated from their mining operations.


OTC trading types explained
• Dealer, Trader - trade with their own money, or ‘on behalf of’ someone through their own account.
• Brokers - an intermediary who finds buyers and sellers.
• Exchange OTC desks - crypto exchanges who run OTC desks (servicing clients who don’t want to trade on exchange).


How are the buyers and sellers finding each other?
• Through private, public and broker specific chatrooms:
  - Broker hosted secure chat rooms.
  - IRC chatrooms #bitcoin-otc.
  - Skype chatrooms (hosted by Cumberland).
  - Telegram, even LinkedIn (according to Forbes) - six figure trades are common.
• Through OTC Brokers
  - iTBit OTC.
  - HiveEx OTC.


How is the off-exchange market executing?
• Through OTC brokers like Octagon Strategy, Genesis Trading and Circle.
• SFOX also offer advanced software for price discovery and price execution. For example, they can enable top of all order book execution across exchanges, and weight average execution.
• The majority of brokers execute based on Request for Quote (RFQ) an
‘Fill or Kill’ (FOK).

 
What are the problems with OTC?
• Settlement risk - there is no guarantee the asset will be delivered, or cash will be paid. Coin transfer often happens much faster than the wire payment transfer (often by several hours).
• No custody solution - most OTC brokers don’t provide a custody solution (or provide a very limited service), which can increase settlement and operational risk.
• Multi-jurisdictional KYC issues - dealing with countries with poor.


KYC regulations can be a deal breaker
• If you execute through an OTC broker you need, for example, to deliver the BTC to the broker. There is no guarantee the brokers client will pay.
• The larger the order the greater the risk of default with multiple counterparties.
• OTC crypto is missing the monitoring and surveillance tools of traditional trading systems.


Is emerging software solving these problems?
• Fiat onramps are being built.
• Fidelity, the world’s fifth largest asset manager, is going to start storing and trading crypto to be sourced from OTC markets for institutional investors.
• Software needs to replicate settlement, clearing and risk management systems.
• OTCXN - building a multi-custodian solution with a clearing and settlement mechanism that connects Liquidity providers. Creating a Layer 2 network sitting above the public ledger.
• OTCXN - partnering with Kingdom Trust and Prime Trust (both registered and qualified Custodians with the SEC).
• Caspian - recently raised $20 mill through an ICO. Wants to build a single user interface that connects to major exchanges. Partnering with BC2C.

 
Case study: Enigma Securities
The process around negotiating a price for an OTC transaction can vary depending on a number of factors, including your counterparty’s preference, the leverage each party has in the negotiation, and the size of the transaction. All OTC transactions begin by finding a counterparty for the trade. Once that relationship has been established and trust gained (usually by being a ‘qualified’ counterparty), the liquidity-seeking party (the buyer in this case) will signal their intent to trade by communicating the size of the trade and the asking price. The selling counterparty will then respond with its own offer price for the trade, often in the form of a percent below a leading exchange’s best asking price. This is to entice the buyer away from purchasing on the exchange.

Many miners of Bitcoin are well known to offer large discounts to sell large orders quickly. It is rumored that HUT 8, a Canadian miner, mines anywhere between 3-5,000 Bitcoin a trimester and sells in this way. Once a price is set and the transaction is confirmed, fiat funds will be transferred to the counterparties bank account or an escrow bank account held by a third party. If executing through a broker both counterparties will be required some form of diligence checks such as KYC/AML and ensure they are complying to local laws and regulations (if cross-border). The seller of Bitcoin will transfer the digital assets straight to the buyer’s digital wallet or an escrow digital wallet held by a third party.

In the case of Enigma Securities, the buyer of Bitcoin will transfer fiat currency to a regulated custodian in New York and the seller of Bitcoin will transfer the digital asset to the digital wallet of the same regulated custodian in New York. Once both sides of the trade are received by the regulated custodian they can be released to the respective counterparties.

According to Enigma Securities:
• There will always be demand for OTC trading but expect the market to shrink as the exchange market matures and consolidates.
• The OTC market will continue to be the preferred path for miners to liquidate in the foreseeable future.
• Most institutions already have OTC desks and infrastructure so expect this market segment to become even more competitive.


Conclusion:
• The OTC market will always have a role to play where:
a) the market is illiquid,  
b) the buyer/seller has a large order and they don’t want to move the market price unfavorably.



Pozagiełdowy Handel Kryptowalutą (OTC) - Wyjaśniony w Szczegółach.
https://en.wikipedia.org/wiki/Over-the-counter_(finance)
https://www.finextra.com/blogposting/16628/otc-crypto-market---at-a-glance
https://www.investopedia.com/terms/o/over-the-countermarket.asp


This thread has been translated into Indonesian and published in their local section which I consider a distinction because it is my first article that has been translated into another language.
Thank you @wumBowo.

[SHARE] Mengenal OTC Trading

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March 26, 2019, 05:29:24 PM
Last edit: April 09, 2019, 06:31:56 PM by crypto mania
Merited by wwzsocki (2), Sharon121212 (1)
 #2

I thought that the majority of OTC trading is made by normal people.
I was sure that OTC is used by average traders to buy or sell cryptocurrencies and tokens not available on exchanges or listed only on a few and not trusted once.
There is a lot of such offers in Telegram groups from people who want to buy or sell and that is why I never thought about big money and multimillion investors.
I don't know maybe You should add that not only big investors and hedge funds are using OTC because this is what I have learned from your article. There is nothing about small traders and investors only big whales and hedge funds.

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March 26, 2019, 05:49:32 PM
 #3

Why cut and paste the entire article from Finextra? I'd prefer a link and your own thoughts below it. A straightforward cut and paste isn't the greatest of looks for anyone.

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March 27, 2019, 05:00:23 AM
Last edit: May 12, 2019, 04:59:43 AM by wwzsocki
 #4

Why cut and paste the entire article from Finextra? I'd prefer a link and your own thoughts below it. A straightforward cut and paste isn't the greatest of looks for anyone.

The main idea was to translate this into Polish language https://bitcointalk.org/index.php?topic=5124817 because this article is very detailed and explains everything.

My post isn't finished and I'll add additional pieces of information today. The translation took me too much time and there is no option on the forum to save a draft of the post so I had to publish my unfinished work. As you see at the beginning of my post a general explanation for the concept of OTC trading is missing. I wanted to add an explanation from Wiki of Investopedia and a few additional important details.

This isn't a simple task to translate such an article into my native language because there are many words which even don't exist yet and I have to figure out how to correctly translate this and additionally I had to change the text because one can't understand it when translated exactly. The Polish text is changed and there are added my own sentences too.

When I finished the translation I had already English version ready with bold letters, nicely arranged and errors corrected so I thought it's worth to publish because it looks better as the original article and reads better, I assume. Additionally, one doesn't have to look for links or the articles on the web only can read that all in the Bitcointalk forum at once.

A few days ago I was visiting my Telegram groups and have seen people talking about a big OTC deal. I just couldn't believe that they're looking to close such a big deal using Telegram and I thought it has to be something fishy or a new attempt to scam people and I started to read about OTC trading because I heard about it many times and wanted to know exactly what that is and how to do it correctly.

I have read a few articles, Wikipedia, Investopedia and finally, found this one which describes OTC trading in details and is complete. I thought is worth to translate to my native language because automatic translations from Google are not good and hard to understand. Sometimes it's just like to read the Chinese language without understanding.

I think this article was so good and detailed so there was no need to change anything and I didn't want to talk about OTC trading with the community only provide detailed information and explanation what exactly OTC is for interested in these subject members from the community and I think, I have achieved my goal.

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March 27, 2019, 01:15:12 PM
Merited by crypto mania (2)
 #5

...I don't know maybe You should add that not only big investors and hedge funds are using OTC because this is what I have learned from your article. There is nothing about small traders and investors only big whales and hedge funds.

Thanks for this suggestion my friend but I found nothing about retail investors/traders OTC market.

For sure this exists but the percentage is so small in comparison to the cryptocurrencies market that this has no influence in reality and is not take into any consideration, I assume.

If you find something about this particular market from any reliable source please share and I will be happy to add some facts to this post.

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April 02, 2019, 09:15:03 PM
 #6

Please share your thoughts or ask questions if you have any regarding this subject. I will try to answer as soon as possible.

I just moved this thread to beginners section because I think is more suitable for this type of post.

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April 02, 2019, 11:33:48 PM
Merited by crypto mania (1)
 #7

Just from research what I can understand is that big investors and trader employ this medium(otc) cryptocurrency trading to escape the hurdles and challenges they might encounter on normal exchange trading.
But top exchanges can still offer big investors trading with minimal challenges and it's much safer
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April 02, 2019, 11:38:20 PM
Last edit: April 03, 2019, 08:12:15 AM by wwzsocki
 #8

Just from research what I can understand is that big investors and trader employ this medium(otc) cryptocurrency trading to escape the hurdles and challenges they might encounter on normal exchange trading.
But top exchanges can still offer big investors trading with minimal challenges and it's much safer

As I said in conclusion:

• The OTC market will always have a role to play where:
a) the market is illiquid,  
b) the buyer/seller has a large order and they don’t want to move the market price unfavorably.

I think another reason to choose the OTC trade is the discount on the price but not only it can be anonymity if the connection is already established and confirmed (no taxes  Wink).

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April 03, 2019, 10:52:09 PM
Last edit: April 09, 2019, 06:30:35 PM by crypto mania
Merited by wwzsocki (1)
 #9

Just from research what I can understand is that big investors and trader employ this medium(otc) cryptocurrency trading to escape the hurdles and challenges they might encounter on normal exchange trading.
But top exchanges can still offer big investors trading with minimal challenges and it's much safer

I can understand big miners and small investors who are using OTC markets to avoid taxes and keep low under the radar.
OTC trading is just like LocalBitcoins service for average people to buy and sell crypto without KYC or any other check which is provided to authorities.

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April 03, 2019, 11:49:26 PM
Last edit: April 04, 2019, 12:24:28 AM by gentlemand
Merited by suchmoon (9)
 #10

I can understand big miners and small investors who are using OTC markets to avoid taxes and keep low under the radar.

OTC trading is just like LocalBitcoins service for average people to buy and sell crypto without KYC or any other check which is provided to authorities.

Try being anonymous with a professional OTC outfit. They'll laugh in your face. They may well be more demanding than an exchange in terms of ID and proof of funds. Obviously it's different if you're selling to some asshole on Telegram but that's p2p not OTC.

The main difference with OTC vs an exchange will be that you'll be allocated a person to handle the process from start to finish. No exchange will do that for you.

I'd never use an exchange for large amounts. If they get twitchy and freeze your money all you are is a ticket number.


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April 04, 2019, 07:09:32 AM
 #11

Over the Counter (OTC) trades also helped to reduce Bitcoin volatility, because much bigger trades are done over Over the Counter (OTC) platforms and this could easily trigger unnecessary panic on exchanges with small volumes, if large amounts of coins are dumped on these exchanges.

We saw the result of a rumoured $300 million trade that was spread over 3 large exchanges over the last couple of days and these was done on large exchanges. <Just think what the result would have been, if this was done on smaller exchanges on a daily basis.>  Roll Eyes

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April 04, 2019, 03:29:48 PM
Merited by wwzsocki (1)
 #12

This is some kind of eye opening for me. Till now I used to think that deals that are done local bitcoins , paxful, personal (or any deal not evolving a exchange) is OTC. I have no idea that OTC is a such big and high volume market.

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April 04, 2019, 10:51:14 PM
Merited by crypto mania (1)
 #13

Try being anonymous with a professional OTC outfit. They'll laugh in your face. They may well be more demanding than an exchange in terms of ID and proof of funds.

I think that all depends on the size of the deal and which side of the trade you are.

Let's say you are a big miner and willing to sell 3000 BTC each quarter I assume that there is a big possibility to close the deal even with established OTC desk or service without KYC for the miner.

In such a situation OTC agent would have to provide proper KYC to the miner and run reputable service to get the deal.  

As you see in my post above one of the main problems with OTC is:
Quote
If you execute through an OTC broker you need, for example, to deliver the BTC to the broker. There is no guarantee the brokers client will pay.
Additionally:
Quote
The larger the order the greater the risk of default with multiple counterparties.

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April 17, 2019, 03:45:27 PM
Last edit: April 17, 2019, 06:17:54 PM by wwzsocki
 #14

This thread has been translated into Indonesian and published in their local section which I consider a distinction because it is my first article that has been translated into another language. Thank you @wumBowo.

[SHARE] Mengenal OTC Trading

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April 17, 2019, 06:17:55 PM
 #15

Damn. I knew about OTC trading before, but this pool of information is something else. Learnt a lot of stuff which I never knew before. Thank you op for translating the article. There was another thread discussing this topic just recently.

https://bitcointalk.org/index.php?topic=5128384.msg50584092#msg50584092

Mind sharing your thoughts op?


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April 19, 2019, 11:25:51 AM
 #16

This thread has been translated into Indonesian and published in their local section which I consider a distinction because it is my first article that has been translated into another language. Thank you @wumBowo.

[SHARE] Mengenal OTC Trading

just saw ur post, and yeah i'm glad to translate your thread.
It's because at first i actually found out "OTC" things on huobi global and when i search on google it's not too clear, but then i found your thread it gives me an enough explanation.

So that's why i translated to my local language, maybe it'll be helpful for the others,too.

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April 23, 2019, 09:56:14 PM
 #17

just saw ur post, and yeah i'm glad to translate your thread.
It's because at first i actually found out "OTC" things on huobi global and when i search on google it's not too clear, but then i found your thread it gives me an enough explanation.

So that's why i translated to my local language, maybe it'll be helpful for the others,too.

My text is translated for the first time and that is why I was so excited. Thanks again and feel free to translate any text of mine you want in the future.

This is true that there is not much information about the OTC market and that is why I wrote this post.

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April 23, 2019, 11:08:07 PM
 #18

I think there are many advantages of buying bitcoin through over-the-counter trading desk such as:

 - Full anonymity of the buyer.
 - Buy a huge amount of bitcoin at the same price
 - The risk of getting hacked is almost zero compared to the exchanges.
 - Instant purchase, there is no placing orders and wait for the price to fall before you can buy.
 - The best thing about over-the-counter trading desk is you can always have a peace of mind in terms of security and price volatility.

Though the bitcoin price is a little bit high at OTCs, but you can get the advantage of buying a huge amount of bitcoins at the same price with no volatility.
The over-the-counter trading desks help a lot in tackling the bitcoin price volatility. Imagine, the whales buying 200,000 bitcoins on the exchanges, uhh! Grin

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April 24, 2019, 03:12:56 AM
 #19

I think there are many advantages of buying bitcoin through over-the-counter trading desk such as:

 - Full anonymity of the buyer.
 - Buy a huge amount of bitcoin at the same price
 - The risk of getting hacked is almost zero compared to the exchanges.
 - Instant purchase, there is no placing orders and wait for the price to fall before you can buy.
 - The best thing about over-the-counter trading desk is you can always have a peace of mind in terms of security and price volatility.

Though the bitcoin price is a little bit high at OTCs, but you can get the advantage of buying a huge amount of bitcoins at the same price with no volatility.
The over-the-counter trading desks help a lot in tackling the bitcoin price volatility. Imagine, the whales buying 200,000 bitcoins on the exchanges, uhh! Grin



  • I disagree with your points. At no time is anonymity guaranteed. On many occasions the exact opposite is required.
  • Often the purchase is broken into several price ranges. Particularly when the market is unstable.
  • The risk of being hacked is as great as in any other negotiation. Since the biggest risk is always on your own computer.
  • There is no instant purchase on the OTC. In fact, the negotiations are much more complex and involve a long conversation 
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May 07, 2019, 09:46:21 AM
 #20

  • I disagree with your points. At no time is anonymity guaranteed. On many occasions the exact opposite is required.
  • Often the purchase is broken into several price ranges. Particularly when the market is unstable.
  • The risk of being hacked is as great as in any other negotiation. Since the biggest risk is always on your own computer.
  • There is no instant purchase on the OTC. In fact, the negotiations are much more complex and involve a long conversation 

Can you please show some examples? I can agree with you if you show some proofs.

I can understand that the OTC market is evolving and there are different types of trades which I haven't mention.

That is why I posted this article to discuss OTC markets because there is not much info to find about this subject.

I am interested in this topic because wanted to sell some tokens outside of the exchange and that is why I explored this subject.

What you have read is what I found on the net and my personal experience. Of course, I can be wrong too.

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