Frequently Asked Questions on Bitcoin OTC

Over-the-counter (OTC) bitcoin trading is becoming a de-facto standard for investing in cryptocurrency on an institutional scale or just buying a large amount at once. However, while adoption is moving forward at a staggering pace, there is still a fair bit of confusion about the basic concepts behind OTC.

Some misconceptions are caused by the generous use of the term to several different business models. Others have to do with the lack of understanding of price formation or the OTC market in general. Yet others have to do with misguided privacy concerns. The only thing they all have in common is this: they will probably cost you money if you choose to ignore them and start trading based on a hunch. The following article addresses the most common questions in the field of bitcoin OTC trading.

What is OTC BTC?

Over-the-counter trading, or OTC, is a way of settling trades directly between participants. So generally speaking, the phrase OTC bitcoin implies any kind of such trading that involves cryptocurrencies. However, the term is routinely used to describe a range of over-the-counter deals that differ considerably between each other. So as you delve deep into the world of bitcoin trading, things may start looking complicated.

The most crucial point to keep in mind is that at its heart, over-the-counter trading the opposite of exchange trading (which is why it is also called off-exchange). So in a broad sense, any deal that occurs between a buyer and a seller and does not involve a centralized entity can be considered OTC. For example, let’s say you find a chat room where miners with large amounts of bitcoin look for buyers and strike a deal with one of them. This is technically an OTC trade, just not a very trustworthy one (also probably illegal).

Some people also refer to buying bitcoin from an ATM a type of OTC trade, which it is – but only marginally. An ATM will state the price it charges for cryptocurrency, which is determined by the vendor. You can say it is OTC because this is not an auction system. However, this system is designed for daily consumer purchases, so if you are looking for large-volume deals, it is clearly not the OTC you are after.

Finally, there are OTC desks – organizations that facilitate OTC cryptocurrency deals through dealer networks. These desks provide safety and security not available in ad-hoc marketplaces like chat rooms. OTC platforms also do not have public order books, which allows for much higher upper limits of deals. The latter is the reason OTC desks have become synonymous with large bitcoin trades.

How does an OTC Desk Work?

From the client’s point of view, an OTC desk is probably the easiest and most straightforward way of buying large amounts of cryptocurrency. The process starts by contacting a desk or a broker, either directly or by filling in a form. It is also not uncommon for brokers who are already proven partners to reach out to their clients with information about lucrative deals. During this initial contact, the client will inform the broker about the desired amount of cryptocurrency to buy or sell as well as any important details and preferences of the trade.

The client then undergoes a routine identity check. Similarly to all financial organizations, OTC desks need to comply with legal anti-money laundering regulations, also known as AML/KYC. This procedure is necessary to ensure that traded funds do not come from an illicit source. This step is a one-time procedure, and OTC platforms usually have a well-established system for it, so it is a minor inconvenience in the worst case.

Once all paperwork is done, the broker will go through their order book and find a selling order or orders with the matching price and amount. Once such deals are found, both sides are informed about the potential trade.

If no further issues arise, the deal is closed. Everyone receives their funds via a preferred route, and the broker gets their commission. If the issues do arise – for example, the price is too high – negotiations may commence. This step is entirely optional and usually resolved quickly with the help of a broker.

Who is OTC broker?

An OTC broker is an agent or organization that specializes in managing trade orders. The main aspect of the broker’s responsibilities is finding a suitable trade for their clients and bringing the sides together so that they can close the deal. They charge a commission for their services, either as a percentage of the deal or as a flat fee.

Brokers also assist the clients in the negotiation process. In some cases, there will be no suitable deal in their order book, but there may be one which is close enough. In this case, brokers will help the participants arrive at a compromise decision that satisfies everybody.

Finally, brokers act as a viable source of information and market insights for deal participants. Thanks to the immersion in the market, they have a better understanding of trends and use it to help clients close deals on optimal terms. OTC desks recognize this strength and capitalize on it by demanding a certain level of expertise. In other words, the process of trading bitcoin OTC is more informative and productive than an unguided exchange experience.

What is the Bitcoin OTC Market?

OTC desks have become a de-facto standard of large-volume cryptocurrency trading. This is mostly due to the level of anonymity and privacy they offer as well as the generosity of upper trading limits. Over time, this popularity has led to the emergence of an entire market segment. Its most recognized defining trait is the presence of investors with massive amounts of funds both in crypto and fiat, which creates liquidity necessary for large-volume sales.

The interesting thing about these players is that while their existence is absolutely crucial for OTC desks to work, there is no real way to verify it. OTC desks never disclose the information about their clientele, so the only way to get the feeling of scale is to look at numbers reported by the key players in the market. According to Reuters, daily trading volumes of 70 to 80 million USD are not uncommon.

The second major quality of the OTC market is its attractiveness to institutional actors. This tendency is viewed as an opportunity by cryptocurrency trading platforms. It is also the main reason major exchanges either have an OTC desk or plan to open one in the near future. The market attracts big investors and hedge funds that aim to leverage the financial potential of bitcoin. All in all, recognition from such an organization means that the OTC market is a force to reckon with in the actively developing world of crypto.

Why Is the OTC Price for Bitcoin Higher than on Exchange?

Peer-to-peer services like OTC brokers connect buyers and sellers directly. This gives both sides a price advantage – mostly because trading in bulk often comes with discounts. Besides, matching two equally large orders means less hassle and fewer commissions. Despite this, it is not uncommon to see the price of OTC bitcoin being higher than on exchanges. To get to the gist of it, we need first to understand how the price of exchanges is formed.

Auction-based platforms like exchanges have a public order book where the sales are made by matching available buy and sell orders. As the book is emptied, the algorithm reaches to less and less attractive offers, and the price goes up. In other words, you may see the price tag of $10,000 when you come to the exchange, but try to place a 100 BTC order, and you’ll probably end up buying most of it for something closer to $12,000.

OTC brokers do not suffer from this effect because their order books are not public. However, they are still susceptible to the risk of price changes in the volatile market. To safeguard against it, they will adjust the price of the offer, which, in the case of a large order, may add up to a hefty sum. However, the difference is nowhere near as dramatic as the one you will get scraping the bottom of the order book on an exchange.

Simply put, the difference is only relevant for small orders – OTC desks will always have the upper hand in bitcoin price for large amounts.

How Is OTC Trading Impacting the Bitcoin Price?

One of the advantages of OTC trading for big-time buyers is that, in theory, it does not have any effect on the market price of bitcoin. In practice, it is a little bit more complicated, but in most cases, the effects of such trades are negligible compared to those made through exchanges.

Here is how it works: when you place an order for the purchase of, say, 100 bitcoins on an exchange, the amount immediately appears on the order book for everyone to see. The deal of such a scale will cause the price of bitcoin to go up, so many traders on the platform will adjust their prices accordingly. Some may even try to buy as much crypto as they can in hopes to cash out later. None of this will ever happen on an OTC desk. The price and amount of bitcoin you intend to buy is known only to you and the buyer and never leaves the broker’s book.

There is a caveat to remember, though. If instead of coming to a trusted broker and closing the trade you decide to ask around for the best deal, the information about a huge looming deal will eventually sip through the cracks. In response, people involved in OTC trade will react in the same way as to see an order in the public book – by buying now and selling later. Nevertheless, as long as traders are mindful of sensitive information and take even the basic precautions, even the largest OTC deals would not pose a threat to bitcoin market price.

How to Buy Bitcoin in Bulk?

Buying large amounts of bitcoin at once boils down to one of two options. The first is going to a centralized auction-based platform such as the exchange. The advantage of this method is availability – exchanges are numerous, and bigger ones will likely have enough cryptocurrency to maintain liquidity. They are also safe, trustworthy, and compliant with regulations.

However, exchanges commonly have quite restrictive caps on daily traded amounts, so the institutional-investor scale of deals is out of the question. Besides, the orders placed on exchanges are there for everyone to see, which in the case of million-dollar deals is a considerable threat to the market price. Finally, exchanges are designed to put traders in control, so be prepared for some fiddling with your funds.

The second option is using a peer-to-peer platform like an OTC desk or broker. These are attractive for clients with large amounts of funds, both crypto, and fiat, and, as a result, have much higher limits on trades. In terms of safety, legality, and ease of use, bitcoin OTC brokers are more or less on par with exchanges.

The main difference is that OTC platforms do not make their order books public. While this may be inconvenient for some people, it also means that deals will not influence the market price, no matter the size. Another benefit is the price – exchanges offer bitcoin. Finally, the process is conveniently handled almost entirely by the broker, leaving only the most important part – the negotiation – to the deal participants. In other words, OTC is geared towards bulk trades and institutional actors, making them the best option for closing large deals in cryptocurrency.

How to Buy Large Amounts of Bitcoin Anonymously?

Despite its reputation of an anonymous currency, bitcoin is actually pseudonymous – meaning that funds can be linked to addresses but not personal identities. In simple terms, it means that it is anonymous as long as nobody can link you to your bitcoin address. With the open nature of bitcoin blockchain, this is easier said than done, so precautions against revealing one’s identity are absolutely necessary.

Here is the rub, though: most OTC brokers nowadays require an ID to allow trading on the platform. The reason for that is anti-money laundering legislation known as KYC and AML, which is intended to curb illegal financial operations. This means you cannot buy bitcoin OTC without linking it to your identity, right? Well, yes and no. Yes, you will need to submit your ID before you can buy a large amount of bitcoin, at least legally. And no, it will not let everyone know about your deal – at least not necessarily.

An important thing to understand here is that OTC brokers are bound by the same non-disclosure agreements as other businesses that work with personal data. So before submitting your ID, take some time to read the platform’s terms and conditions. Are terms clear and honest? Are there robust KYC policies in place? Do they ensure that personal data is managed responsibly? Are there safeguards against data theft? If the answers are yes and the chosen OTC service is reputable – you have your bases covered and can rest assured that trades will be anonymous.

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