5 Mistakes to Avoid While OTC Trading
OTC desks are rightfully viewed as a go-to way for large bitcoin deals. This reputation is due to a number of advantages, such as discretion, price protection, and fewer limitations compared to exchanges. However, this is not to say they are flawless.
Some of the risks are systemic, but a surprisingly big chunk is due to poor decision-making. So once you can answer ‘what is OTC trading’, make sure to familiarize yourself with the most common mistakes in the field. Keeping this information in mind will help you avoid financial pitfalls and, occasionally, pave the way to the best deals on the market.
What Does OTC Mean?
OTC stands for over-the-counter, a way of trading where the trade is made between a buyer and a seller. Deal participants are connected via cryptocurrency brokers in USA – an expert who finds matching sale conditions and assists the negotiations. While this method is suitable for all kinds of trades, it is preferred by investors and institutions dealing with large amounts of bitcoin.
An OTC deal does not become public, which helps to preserve sensitive information. Such discretion also means that a large-scale cash-out will not affect the market price of the cryptocurrency. Finally, OTC desks provide a level of assistance and support not available on most exchanges.
Some mistakes in the list below occur due to poor understanding of the market, but most are psychological in nature. And this is probably a good thing: being mindful about failures will often be enough to stay on the safe side.
Cheap Doesn’t Mean Good: Don’t Shop Around
One common mistake in the domain of OTC bitcoin trading is trying to strike the best deal by contacting one OTC trading company after another. The idea is that sooner or later, you will find the best price. This behavior, known as “shopping around,” is not unique to OTC market trading – it is a part of human psychology.
However, it does not work in the same way when looking for a new phone versus buying cryptocurrency. Shopping around for bitcoin may well ruin the deal for you.
The reason for this is the principle behind OTC trading. Unlike traditional services like cryptocurrency exchanges, OTC trading platforms can keep their prices relatively unaffected by market fluctuations. Understandably, this is only true as long as the parties are uninformed.
By shopping around, you essentially inform the broker about the change in supply and demand. As the broker tries to find a match for the deal, the information spreads until another big player gets an idea of removing their offers from the market. By the time you return to the broker, you will probably get a far less attractive price.
To avoid this, try to keep the number of OTC brokers you deal with to a minimum. Decide on the price that is right for you, inquire at the OTC trading platform you trust, and think twice before asking around.
Stay Secured and Ask about All Rates
Shopping around can be bad for the price of your deal, but so can over-reliance on a single OTC trading company. Here is an example: you are looking to cash out a large amount of bitcoin, let’s say 500 BTC, in a single deal. You call a broker and ask whether this would be possible.
You only spoke to one party, so what could go wrong, right? Wrong. What you just did is known among traders as “showing your hand,” and this information is enough to put you at a disadvantage.
A sale of 500 BTC in a single transaction can lower the market price of the cryptocurrency. So what may happen next is the broker would sell bitcoins online at once, then proceed to trade with you at the previously stated price. Only now the market price has gone down, so the OTC trading platform has a hefty advantage while you are facing additional expenses.
On top of that, since the market has already reacted to the broker’s sale, you cannot avoid losses by going to a different platform.
What you can do instead is ask the broker about several rates above and below the intended amount. In the 500 BTC example, ask about buying and selling rates for 50, 100, 500, and 1000.
Not only do you obscure the details of your deal, which would secure the market price, you can also get a better idea of the profit margins of the OTC trading platform, essentially forcing the broker to show their hand.
Predictability Is Not a Friend
The third common mistake has to do with behavioral psychology rather than market mechanisms. Specifically, it is related to the tendency of humans to stick with the patterns they are used to. Once these patterns become obvious to brokers on OTC trading platforms, they will try to use this knowledge to their advantage.
Let’s imagine that you have selected two trusted brokers you prefer to trade with. Each time you seek to buy large amounts of bitcoin, you ask both of them for their rates before settling on the best price. Suppose this happens two to four times a month. It will not take long until at least one broker notices this pattern and figure out you are searching for the best price on the market.
Next time you call their OTC trading platform, they will say whatever you want to hear, knowing that you will not close the deal right away. After you call your other broker, you return to the one who named the lowest price. Naturally, this time they will stick with the real, less attractive rate. However, by this time, you have already decided on the preferred seller and think that others will probably raise their price too.
Admittedly, there is no easy way around it. All you can do is try to behave as unpredictable as possible, which is easier said than done. Pay attention to the habits that may put you at a disadvantage, don’t go the trodden path, and take the offers that sound too good to be true with a grain of salt.
Think Twice and Don’t Sell Full Amount
The next mistake that is particularly common in OTC bitcoin trading is buying or selling the entire amount of cryptocurrency in a single deal. As was mentioned above, OTC trading platforms operate in a way that protects the market from crashing.
However, this does not mean that the deal will not affect the market at all. Rather, its effects will be delayed, which means that in the case of a large-scale trade, the broker will probably face losses.
To safeguard the profits, the predicted change in market price is incorporated into the price of the deal. In simple terms, this means that the rate of buying a small amount of bitcoin from an OTC company is almost always lower than the large one. The difference can be negligible between, say, 100 and 200 BTC.
However, when it comes to thousands of bitcoins, which is not unheard of among corporate investors, the losses can be staggering, and so will be the price. Fortunately, this effect is easy to avoid. Just remember to break down your trades into reasonably sizeable chunks and enjoy fair OTC trading conditions.
Remember OTC is a Slow and Volatile Market
The fifth and final mistake is ignoring the specificities of the cryptocurrency market while trading. Despite considerable adoption in recent years, bitcoin remains susceptible to day-to-day changes in trading activity.
It is still uncommon to see periods where OTC market trading tanks because of the holiday season or even a rogue news article. Trying to close a deal on such a day means that the broker has to exhaust the order book, giving a subpar price.
The high volatility of OTC market trading has a similar effect. While it is true that volatile markets are often active ones, they also make it difficult to settle on the price of bitcoin. To avoid losing money, brokers would hedge by raising prices to account for risks.
If you do not like paying for volatility out of your pocket, it is always a good idea to do a bit of research. Remember that a slow and volatile market is an unpredictable market and be mindful of when you are looking to close the deal.