The cryptocurrency market offers a variety of ways to trade and invest in digital assets. The most common way is to use cryptocurrency exchanges. Be it a centralized or decentralized platform, they allow for the efficient trading of digital assets, offering asset prices based on market conditions. Therefore, crypto rates offered by exchanges always rely on the supply-demand ratio.
When a sharp large-scale asset sale occurs on a crypto exchange, this may cause significant fluctuations in the market, swinging its prices down (when an institution or high-net-worth trader sells a large amount of assets, the market may go through panic sales, creating a bear trend).
To avoid creating market turbulence, large-scale investors come to using a crypto OTC platform (over-the-counter). Those desks allow for over-the-counter cryptocurrency transactions, which means they are not visible in public, thus, they do not influence market stability. This is why many wealthy individuals or big investors use OTC desks for large-scale transactions. But that’s not the only reason.
This article will discuss the benefits OTC trading offers investors and the risks of using OTC desks. Let’s begin with the benefits.
High-Volume Crypto Trades
Regular crypto exchanges do not always have enough liquidity to execute institutional crypto transactions for they usually come in large volume. On the contrary, OTC desks are always ready to manage such transactions with no restrictions. Often, OTC desks have access to large networks of liquidity providers who ensure transactions of any size are processed effectively. Moreover, institutions do not have to split their trades into several transactions – with OTC desks large asset volumes are sold (or bought) in one single transaction. In addition, OTC trading eliminates the risk of price slippage by allowing the trade parties to discuss the asset price directly, ensuring that the agreed price will not change no matter how large the transaction volume is.
High Crypto Liquidity and Access to New Tokens
As mentioned above, unlike crypto exchanges that usually have limited liquidity inbuilt into their platforms, OTC desks cooperate with numerous institutional participants, high-net-worth individuals, etc., so it is easy for them to find counterparties for any incoming request quickly. It helps OTC desks ensure better price execution and less trading friction, ensuring that large trades do not have any impact on the whole market.
One more thing — OTC desks usually have connections with new crypto projects and startups, so they may offer recently launched tokens that are not yet available on regular crypto exchanges. This is a great opportunity for institutions to get their hands on new promising assets. Investors get a wider range of tokens to buy at an early stage, which is a part of the diversification strategies.
Private Cryptocurrency Trades
Privacy often comes as a decisive factor for institutions and companies looking for a channel to trade crypto assets. For those who don’t trust providing personal data to a third party like a crypto exchange, OTC desks offer an entirely confidential way to execute transactions between parties privately. When arranging trades through OTC, client documentation or funds are not shared with unauthorized third parties.
Market Manipulation Prevention
This is another benefit of OTC trading. It relates to the safety of the whole market, for OTC traders help reduce the risk of market manipulations and facilitate price stability in large trades. Large trades on public markets tend to cause price changes and market sentiment. On the contrary, when large deals are completed on OTC trading platforms, they are not revealed to the public, making it difficult for malicious actors to manipulate the market.
Customizable Trade Terms
What’s good about OTC trading is the possibility of negotiating terms, prices, settlement dates, payment methods, and everything else related to transactions between the parties. Such flexibility allows institutions to execute their complex trading strategies, impossible to perform on regular crypto exchanges. A customizable approach in OTC trading allows every participant to match their trades with goals having the feeling of total control over their strategies. This institutional-level transaction arrangement perfectly suits investors who need more flexible trading conditions rather than the standard terms crypto exchanges offer.
Faster Transactions
As mentioned above, institutional crypto transactions carried out on OTC desks imply parties to arrange the date, price, payment method, and other details about their deal. Since they communicate and transact peer-to-peer, no middlemen are involved (except for the OTP desk, which connects the parties in the shortest time but does not hold their funds). So, settlement between counterparties occurs directly – from buyer to seller- cutting the process that would be held in crypto exchanges.
Risks in OTC Crypto Trading
Here are considerations when dealing with OTC platforms:
- The need for trust. OTC trading is built on trust and reliability in counterparties. That is why there is a chance that some of them do not carry their commitments, which will cause financial losses to another party. Contrarily, crypto exchanges provide this layer of protection by acting as an intermediary. The only way to make sure you deal with a reliable counterparty and use a trusted OTC desk is through due diligence. Check the OTC platform’s track record, ask for business partners’ advice, who had dealt with this or that OTC platform in the past, etc.
- Insufficient regulations. In some states or countries, crypto regulations are still in the development stage. While centralized exchanges operate under strict regulations, OTC markets work in a rather loosely regulated environment. This may sometimes cause difficulties when trying to solve disputes or submitting complaints in the case of fraud. This is why institutions aiming to use OTC trading services should first learn the regulations they operate in, especially if they transact with counterparties living in jurisdictions with limited OTC trading regulations.
- Fraud is another reason to be cautious when tapping into OTC trading. Bad actors and criminals may take advantage of the shortage of regulations and the trustful basis of OTC desks. Fraud activities may include, for example, price manipulations. To protect themselves against corrupt activities, institutions should learn counterparties’ backgrounds thoroughly and use only secure payment methods.
Wrapping up, OTC trading opens a lot of benefits and possibilities for large-scale traders and institutions. Privacy, customizable trading terms, sufficient liquidity for large trades, and fast transactions — make OTC trading preferable for corporate crypto transactions. However, diversification is the core of successful asset management, so using reliable crypto exchanges alongside OTC trading desks can provide investors with a balanced approach to optimize their strategies and reduce risks. Be it a crypto exchange or OTC desk, careful due diligence is crucial. Before entering any agreements and sending funds, institutions should ensure they deal with a trusted platform and reliable counterparty and be informed about legislation applied to the jurisdiction they operate.
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