How Bitcoin Brokers Trade Millions Without an Exchange

[LakeBTC]

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 trade

Trading 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 environment

Speed 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/

[jaberwock]

Wouldn't be easier get directly from big miners at exchange rates? Without middleman?

[TimeWatch]

There are many such deals going on around the online money making currencies.I have a huge list of currency exchangers who buy/sell Bitcoin from various online communities and done many trades.Always faster than getting logged onto exchanges and waiting for the withdrawal.Just figure out whom you could trust and see the reputation

[H.W.Z]

Wouldn't be easier get directly from big miners at exchange rates? Without middleman?

Yes, if you can find the big miners willing to sell. But without accountable middleman, the security is a big issue.

[MoonRise]

Wouldn't be easier get directly from big miners at exchange rates? Without middleman?

Yes, if you can find the big miners willing to sell. But without accountable middleman, the security is a big issue.

Or you meetup to him in person and perform hand to hand trade.

[countryfree]

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.

5% fee is huge. I understand this is a way to prevent slippage but smart guys do not make large single trades.
I remember living in a country which had very stringent currency controls, and I had to cross the border one dozen times to slowly move some cash out of it. Sure, you can't move millions this way, but few people move millions.

[panju1]

The lack of liquidity on exchanges is an issue.
Hopefully, it should be taken care off once bitcoin becomes more popular.

[master-P]

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.

5% fee is huge. I understand this is a way to prevent slippage but smart guys do not make large single trades.
I remember living in a country which had very stringent currency controls, and I had to cross the border one dozen times to slowly move some cash out of it. Sure, you can't move millions this way, but few people move millions.

I don't think 5% is that big, it is typical to what you would see at a BTC ATM. It is something that many liquidity providers charge on LBC.  It is also likely priced so that the broker could sell the bitcoin on an exchange while not causing so much slippage that he looses money on the sale. It is essentially the price to transfer the risk of selling large amounts of bitcoin on an exchange from the owner of the bitcoin to the broker.

[panju1]

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.

5% fee is huge. I understand this is a way to prevent slippage but smart guys do not make large single trades.
I remember living in a country which had very stringent currency controls, and I had to cross the border one dozen times to slowly move some cash out of it. Sure, you can't move millions this way, but few people move millions.

I don't think 5% is that big, it is typical to what you would see at a BTC ATM. It is something that many liquidity providers charge on LBC.  It is also likely priced so that the broker could sell the bitcoin on an exchange while not causing so much slippage that he looses money on the sale. It is essentially the price to transfer the risk of selling large amounts of bitcoin on an exchange from the owner of the bitcoin to the broker.

The brokers do not take any risk, they just find buyers for the large chunk. The 5% is what the broker charges, not the buyer.
The price quoted seems to take care of the liquidity premium.

[itsAj]

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.

5% fee is huge. I understand this is a way to prevent slippage but smart guys do not make large single trades.
I remember living in a country which had very stringent currency controls, and I had to cross the border one dozen times to slowly move some cash out of it. Sure, you can't move millions this way, but few people move millions.

I don't think 5% is all that much. If you wanted to buy or sell on LBC then you would likely pay a lot more then 5%. I think one thing working with a broker will effectively do is protect you from people who watch the order books in exchanges and see that someone is trying to buy/sell a large amount and trade in front of them assuming the large order would move the market.

[Nagle]

Harrison charges a 5% fee for an OTC trade.

Wow. 5% fee on a large trade. That's huge for a simple transaction. That's about what you pay to sell a house. Normal trading fees for large stock, bond, and option transactions are well below 1%.

[ticoti]

Interesting i didn't about this
5% fee may look high but if they pay it it may be because it is worth...

[countryfree]

I can't believe what I'm reading!

A 5% fee IS huge. I thought bitcoiners hated paypal because of its high fees, but paypal's fee is less than that. Currency changes too, cost less than that, and now that bank wires are free at most banks (when there isn't a currency change), a 5% fee would take us back to the old days of western union. I don't want that.

[johncarpe64]

I can't believe what I'm reading!

A 5% fee IS huge. I thought bitcoiners hated paypal because of its high fees, but paypal's fee is less than that. Currency changes too, cost less than that, and now that bank wires are free at most banks (when there isn't a currency change), a 5% fee would take us back to the old days of western union. I don't want that.

If you are dealing with 7 figure dollar amounts with bitcoin then you will cause the market to move against your favor. I can only speculate as to how much trying to buy or sell a million+ dollars worth of bitcoin would move the market but I would think it would be close to 4-5% easily.

You should also note that if you tried to send a million dollars (or even deposit as much) with paypal, they would likely outright reject the transaction so you would not be able to use paypal for these amounts period.

[littlewizard]

There are some small bitcoin communities, including miners, brokers and investors that they can trade bitcoin locally

[countryfree]

I can't believe what I'm reading!

A 5% fee IS huge. I thought bitcoiners hated paypal because of its high fees, but paypal's fee is less than that. Currency changes too, cost less than that, and now that bank wires are free at most banks (when there isn't a currency change), a 5% fee would take us back to the old days of western union. I don't want that.

If you are dealing with 7 figure dollar amounts with bitcoin then you will cause the market to move against your favor. I can only speculate as to how much trying to buy or sell a million+ dollars worth of bitcoin would move the market but I would think it would be close to 4-5% easily.

You should also note that if you tried to send a million dollars (or even deposit as much) with paypal, they would likely outright reject the transaction so you would not be able to use paypal for these amounts period.

You must avoid single deals worth 7 figure dollar amounts. You split it and make several transactions spread along a fortnight, or more. That, of course, unless you don't mind loosing $50,000 as a fee. Let's forget paypal, as the banking sector is more efficient, most fees are capped at 2 or 3 figures.

[leannemckim46]

I can't believe what I'm reading!

A 5% fee IS huge. I thought bitcoiners hated paypal because of its high fees, but paypal's fee is less than that. Currency changes too, cost less than that, and now that bank wires are free at most banks (when there isn't a currency change), a 5% fee would take us back to the old days of western union. I don't want that.

If you are dealing with 7 figure dollar amounts with bitcoin then you will cause the market to move against your favor. I can only speculate as to how much trying to buy or sell a million+ dollars worth of bitcoin would move the market but I would think it would be close to 4-5% easily.

You should also note that if you tried to send a million dollars (or even deposit as much) with paypal, they would likely outright reject the transaction so you would not be able to use paypal for these amounts period.

You must avoid single deals worth 7 figure dollar amounts. You split it and make several transactions spread along a fortnight, or more. That, of course, unless you don't mind loosing $50,000 as a fee. Let's forget paypal, as the banking sector is more efficient, most fees are capped at 2 or 3 figures.

With a broker you would be able to lock in your price all at once and would not need to risk the price of bitcoin moving against you while you are buying or selling.