OTC (over-the-counter) trading is cryptocurrency trading that takes place away from cryptocurrency exchanges. Favored by many large-scale traders, OTC trades are often placed by hedge funds, private wealth managers or high-net-worth individuals.
OTC trades can be facilitated in several different ways, including the following:
- Via brokers. OTC trades are increasingly handled by brokers who specialize in large transactions. These platforms offer a personalized service to help high-volume traders execute large block trades and avoid problems with slippage by accessing funds through liquidity providers that hold large amounts of cryptocurrency.
- Through chat rooms. The first major OTC trading of bitcoin took place in an IRC chatroom called #bitcoin-otc. This trading network is hosted on various IRC channels and allows peer-to-peer transactions between traders.
- Using ATMs. Bitcoin ATMs allow customers to convert their fiat currency into digital coins without needing to go through an online exchange.
There are several reasons why large-volume traders might consider going OTC:
- Better prices. The traditional (on-exchange) cryptocurrency market is still in its infancy, and there may not always be sufficient liquidity available on exchanges to process large trades. As a result, placing a substantial trade through a traditional exchange could move the price of a cryptocurrency in an unfavorable direction before your trade could be completed – this is known as slippage. Instead of being filled for a single price, large orders can end up being spread over several smaller orders, with the price of each order often increasing. OTC trading allows traders to access one price for a single buy order.
- Avoid low trading limits. Most traditional exchanges place a limit on the maximum amount a user can trade per day as well as on the amount that can be withdrawn from an account in a 24-hour period. These limits can also vary based on factors such as the transaction methods used, the level of account verification completed and how long a user has been trading with the platform. In many cases, they may be insufficient to meet the needs of large-scale traders.
- Quicker trading times. Depending on the liquidity available, large trades can take days to be completed on a traditional exchange. Using OTC trading can guarantee faster processing times.
- Use a trusted broker. There have been numerous examples of traditional cryptocurrency exchanges being targeted by, and all too frequently falling victim to, hacking attacks. Placing OTC trades through a trusted broker allows you to avoid this risk.
OTC trading pros
- Designed for large-scale trades, either for high-net-worth individuals or institutional traders
- Allows you to avoid slippage, which may result in a better price
- Avoids hacking risks associated with cryptocurrency exchanges
- Allows you to deal with a trusted broker
- Often offers a faster settlement of large trades and quicker access to your funds than exchange-based transactions
- Also a viable option for ICOs looking to convert crypto earned from their projects into fiat currency
OTC trading cons
- May have higher fees than traditional exchanges
- OTC trading can’t be automated through an API like exchange trading can
- Only for large-scale investors, so not an option for small traders
- If using a broker, you’ll need to trust the broker to thoroughly vet counterparties before trading
- Higher level of settlement risk than traditional exchange-based trading
- Trading directly on an exchange may be more beneficial for those who want to actively trade price movements.