The following post was provided by Mariam El-Rafih, head of marketing for NDAX.io.
OTC desks are not typically something the average retail investor worries about. But they are worth understanding even if you aren’t doing the kind of volume that would make you the target audience for OTC transactions. Why? Because high-volume and institutional investors are moving the crypto markets — churning the same waters everyday investors are swimming in. Recent reports have confirmed the impact they have on demand and pricing based on the increased volume coming through OTC exchanges.
Volume on OTC desks spiked in April — with dollar trading volume on the two top tiers of OTC Markets—the OTCQX Best and OTCQB Venture Markets—rose 15 per cent and 14 per cent, apparently in response to the COVID-19 pandemic.
The Block recently reported that DeFi trades are increasing on OTC exchanges. DeFi has been so hot the first half of 2020, it’s not a surprise.
BraveNewCoin recently reported the effect that BTC whales can have on the market — but these whales are using OTC so the number and nature of these whales are changing, including not just an expanding number of big BTC investors but also institutional investors, who have been at least in part responsible for BTC’s strength and quick recovery from setbacks in 2020.
For big crypto investors and institutions, OTC trading is their best way to access crypto — for the rest of us it’s something we need to understand to track market movements.
Benefits of using an OTC desk
To most, the OTC trading desk is synonymous with a high-volume trading platform. That is because over-the-counter trading offers higher liquidity than what is typically available on a cryptocurrency exchange. It also offers a level of protection for traders worried about slippage. Slippage occurs when mid-trade the price of an asset increases or decreases in the market, potentially making the trade unfavourable. OTC trades are conducted by setting an agreed-upon price, ensuring against slippage and poor liquidity.
With OTC trading, each trade is performed with the buyer or seller directly. As a result, there is less of an impact on the price of the currency. This is a result of trades being done through liquidity providers. With multiple liquidity pools, the trade is derisked and prices appear less volatile as a result.
Additionally, OTC platforms are known for having greater flexibility in offerings that can be traded. This is because OTC platforms offer users the chance to purchase digital assets that haven’t been listed on the crypto exchange yet. For high-volume traders looking for an early advantage on a new asset, an OTC desk should not be overlooked.
The last key benefit that should be noted is that of settlement. In most cases, OTC trades with no limit can be settled on the same day. This means within one business day an investor can receive or make payment for the purchased assets and continue executing new trades.
When is OTC trading the right choice?
The biggest limiting feature of a cryptocurrency OTC exchange is that there is a minimum amount that can be traded. The minimum trade amount varies by the platform with the lowest entry-amount being $50,000. However, when comparing OTC desks it is not uncommon to find transaction amounts upwards of $120,000. As a result, the majority of buyers have been hedge funds, brokerage firms, investment banks and high-volume day-traders. Sellers are frequently cryptocurrency miners and Bitcoin ATM providers.
The advantages of flexibility for complex transactions, access to unregulated commodities, and reduced fees by volume make the most sense for large and institutional investors.
However, along with the buyer-to-seller connection and independence in unregulated transactions that they deliver, OTC desks can also allow new opportunities for misdoings. Decrypt reported Chinese authorities have recently launched an investigation of an investor using OTC desks who has allegedly laundered $73,500 in USDT stablecoins. As a result, China has punished OTC desks with a five-year ban.
These kinds of problems are possible wherever crypto is traded — but it is a reminder that OTC desks can be a bit like working without a regulatory net, so caveat emptor even more than usual with crypto investing. Of course, those risks can be mitigated by working with an established, compliant exchange that has an OTC desk and more reliability than smaller OTC operations.
How to get trading
Many crypto exchanges are now offering OTC trading, so you can choose large exchanges like Kraken, but OTC relies on detailed levels of control and a great deal of trust. If you are looking for something out of the ordinary and a very high-level of service, you might consider an exchange like NDAX.io, which recently celebrated $200 million in institutional crypto trading by expanding and re-branding their OTC desk as NDAX Wealth.
NDAX has quietly grown since its launch in 2017, relying on its ability to handle complex trades, its foundational devotion to leading in compliance, and — most unusually — a strong focus on customer service. For the retail buyer, that means you can pick up the phone and call support 24/7. But for the more rarefied OTC investor, you will be assigned an account executive to work with you when you open your account, giving you a level of human-led support that resembles traditional banking than what we have come to expect from blockchain.
With NDAX, you can trade a number of cryptocurrencies including, but not limited to Bitcoin, Ethereum, Litecoin, XRP, Stellar, Cardano, ChainLink and EOS.
A terrible year for the world, but great for crypto
A difficult year in 2020 has done more to legitimize cryptocurrencies’ and digital currencies’ roles in our global economy than 1,000 well-meaning white papers ever could.
Crypto is here to stay — it’s an important part of most investors’ hedge position and (though time will tell) BTC is potentially a store of value that, so far in 2020 has been more reliable than oil and gas or even gold.
Whether you are dabbling in alt coins or investing at scale, keep an eye on the OTC market — we have grown past the age where a few whales would move BTC and perhaps grown into a proper ocean full of big movers and shakers, which is something any investor will want to watch.
