.jpg)
Behind the Scenes: Unveiling the World of a Bitcoin OTC Desk
Bitcoin’s volatile nature has left traders in a continuous state of speculation as they try to make the moves that guarantee the most gains. Although most of these activities have been largely restricted to crypto exchanges, high-volume traders have often reported continuous dissatisfaction.
Hence, instead of waiting on exchanges to execute their trades, they seek out buyers or sellers for themselves.
The best places to find them are OTC desks, which are the traditional trader-dealer networks that existed long before Bitcoin’s emergence.
As the adoption of these decentralized networks increases, market players on the sidelines might question what makes them widely accepted.
To get a peak behind the curtains, here’s everything you need to know about the world of Bitcoin (OTC) desks.
What are Bitcoin OTC Desks?
A Bitcoin OTC desk is an off-exchange decentralized dealer network where buyers and sellers transact huge amounts of Bitcoin. These desks are run by brokers with a vast network of Bitcoin buyers and sellers to facilitate OTC trading.
Bitcoin trading at an OTC desk like this: https://bitcoin.com.au/otc/ differs from trading at a crypto exchange in that the trade happens directly between counterparties rather than through the exchange.
Consequently, there is no need for the use of a public order book as the desk connects the buyers and sellers privately.
Rising Adoption of Bitcoin OTC Trading
OTC trading started when investors began considering Bitcoin’s use as an effective hedge against inflation. Before this period, Goldman Sachs became the first major U.S. bank to execute a Bitcoin OTC trade in 2022.
Bitcoin OTC trading took off following Bitcoin’s previous bull run, which started in 2020 and extended into 2021. The increased investor adoption at the time saw Bitcoin OTC holdings rise to a record 11,928 BTC in August 2020.
However, following the subsequent downtrend, OTC desks saw a reduction in holdings in the following year.
Now, with another bull run mounting ahead of the upcoming Bitcoin halving event, the crypto market is experiencing an increase in Bitcoin OTC holdings. On June 21, 2023, they experienced a 12.45% increase, which saw the total amount climb from 5,244 to 5,899.
A rise in Bitcoin OTC trading is usually a signal of whale sentiment and possible investment opportunities. It shows that Bitcoin market players are making some moves they would like to keep private, and it is something to monitor to stay on the right side of the market.
The majority of market players who trade at Bitcoin OTC desks include the following:
Hedge Funds
Venture Capitals
Institutional Investors
Bitcoin Mining Companies
High-net-worth individuals
Bitcoin OTC Trading: The Good
So, why would entities with large amounts of Bitcoin ignore the seemingly ‘safer’ crypto exchanges to trade at OTC desks? Here are some reasons:
Liquidity
Sometimes, even the biggest crypto exchanges cannot handle the quantity of Bitcoin these ‘whales’ want to trade. Entities who need to trade at Bitcoin OTC desks average about $25,000 to $75,000 per transaction, and exchanges don’t often have that much liquidity.
So, they might try to connect multiple sellers or buyers on the exchange platform, but that will take quite some time. However, OTC desks are where you can find deep wallets or pockets!
Price Slippage Avoidance
In the process of trying to pull multiple orders together in exchange for a large trade, there’s a high probability of exhausting the low-price orders. When that happens, you’ll have no choice but to include the high-priced orders and that takes you above or below the expected market price.
This situation is known as price slippage, and it messes up with the profits on high-volume trades. OTC desks, on the other hand, are structured to cater to these high-volume trades as traders can determine and lock in their prices ahead of time.
Fast and Customized Trades
Since the counterparties in an OTC trade are limited, the trade is bound to be faster compared to trading at exchanges. Buyers and sellers can get their fiat or digital currencies immediately after the case is executed because it is already on the ground before the trade commences.
Likewise, buyers can customize trades depending on their preferences.
Privacy
Lastly, nobody has to know.
The OTC desk brings the buyers and sellers in direct contact with each other. Yet, they can remain anonymous as they are not obliged to reveal their identities.
Instead, the broker moderates the trade by quoting the buy and sell prices for the counterparties while ensuring that both entities understand their requirements and expectations. This structure introduces a high level of personalization and privacy to the trading experience.
Bitcoin OTC Trading: The Bad and the Ugly
Nonetheless, trading at OTC desks has presented some challenges and risks in recent times. The following are some of them:
Settlement Risks
Since both parties in an OTC trade are in charge of the trade, there is a risk one or both parties won’t perform their end of the bargain. And with the volume of transactions involved here, that can be devastating.
Ideally, the OTC broker is expected to ascertain the legitimacy of entities they invite to the desk. However, the fact that they are not required to hold buyer and seller funds as an exchange does limit their responsibility to a great extent when a counterparty defaults.
Regulatory Uncertainties
Even if both parties do not default, issues may arise if they’re located in different geographical areas. Crypto regulatory frameworks differ across locations, so payments regarded as legal in some areas may be illegal in others.
The fact that OTC transactions must meet KYC requirements makes these cross-border payments an issue for OTC traders.
Conclusion
OTC desks connect buyers and sellers without the involvement of centralized exchanges. This ensures more liquidity, privacy, and fast and customized trades for both parties while helping them avoid slippage.
Nonetheless, they must conduct adequate background checks to avoid counterparty defaults and regulatory issues. These are very common in Bitcoin OTC desks.
