The Evolving Bitcoin OTC Market


Conor Maloney

September 5, 2018

Bitcoin OTC markets have been the subject of much debate in the crypto space due to their major, unseen influence on the price action.

We’ve written about OTC trading before, but as a brief refresher, OTC trading stands for over the counter trading, and it basically refers to decentralized trading that doesn’t take place on an order book visible to the public.

For example, while regular trades which occur on Binance, Coinbase Pro, etc, can be seen by all, OTC trades occur privately between brokers and clients. A regular trade on an order book has the potential to influence the price action directly – when buyers see major sell orders coming up it can prompt other people to try to sell as well, triggering a price decline, and the reverse is true with buy orders.

However, OTC trades don’t contribute to the market value in the same way and this has its own repercussions. OTC trading, as we’ve mentioned before, can result in a huge interconnected web of people who will all be affected by the loss of one person, and even within that network it can be very difficult to figure out how many people are involved or what the total risk is.

Because the trades are hidden, OTC trading can cause the true value of a commodity to be grossly overestimated (or underestimated, potentially), leading to bubbles, collapses, and other catastrophic market failures.

The OTC Market Right Now

Major players who want to buy significant amounts (millions of dollars worth) at the same time face major price slippage if they attempt that on a regular exchange. As we know, large orders tell other buyers which way the wind is blowing, so to speak, so a buy order of $1 million for example) would cause the price to increase on that exchange and result in the buyer getting less value for money.

One solution to this is market manipulation, something that technically isn’t yet illegal in the unregulated crypto markets – whales wishing to accumulate can gather a large sum of bitcoin over time and then start placing massive sell orders, driving the price down, only to cancel before the order executes and then repeat the process, buying the dips that they create. Unethical but effective and often seen on major exchanges.

The other solution is OTC trading. Whales can also contact private brokers or OTC services and organize an off-the-books trade at a fixed rate. They’ll pay a fee, of course, but it’s still more worth their while than the price slippage on an exchange.

There are a number of brokers and services that allow people to participate in OTC trading. Sofx is a startup company connected to nearly every crypto trading desk (of which there are hundreds) and OTC service (there are dozens that we know of). Sofx uses a ‘smart router’ that scans for the best prices for their clients, enabling them to save approximately 2.5% on major trades according to the CEO.

The company also facilitates ‘stealth trading’, a system designed to prevent the price slippage seen in other markets. Sfox says its “secret sauce” algorithms help to hide that trade until it gets executed, preventing the market from cratering.

Other services for whales include:

  • BitStocks
  • CircleTrade
  • Cumberland
  • itBit
  • JumpTrading
  • IBC Group
  • Genesis Trading

There are quite a few of them, let alone private dealers that you’ll never hear about unless you’re very well connected. In fact, while exchanges set the price of bitcoin, the bitcoin OTC market is where the vast majority of bitcoin sales take place, meaning that the trading volume seen on coinmarketcap, etc, is less than half of the true global volume for which there are no statistics.

Services for regular buyers

You don’t have to be a millionaire to buy OTC.

ICOs enable buyers to purchase emerging cryptocurrencies in bulk without slippage, for example. For Ethereum there’s Airswap, a decentralized platform for ETH transactions. Helsinki startup LocalBitcoins enables people to trade over the counter with each other, and has an escrow service for added security.

It’s also possible to simply contact people on forums on in person to arrange an OTC trade, although personal and financial security is strongly advised in such trades where no escrow is in place as there are reports of people physically going to meet potential buyers only to be kidnapped and robbed.

Is OTC Trading Cheaper For Buyers?

Not necessarily. OTC traders make money by buying low and selling high, leading to a zero-sum game situation – for every dollar you make, they lose a dollar, and the reverse, meaning your interests and those of your broker’s aren’t necessarily aligned.

Because the brokers are aiming to profit off you and because you can’t actually see the market spread when you’re placing a major order, it’s a more opaque process than buying on the order books. While you’re guaranteed to lose some value placing a huge order on an exchange in one go, there’s the potential to get burned even worse trading OTC unless you know what you’re doing.

OTC traders often shop around for prices to avoid this, and surprisingly this can be a huge mistake. As mentioned, the OTC brokers are generally part of an interconnected network, so shopping around can sometimes just amount to showing your own hand. A way around this is having someone else shop around for you and then using that information to make your own inquiries – people often talk to their brokers in live chats simultaneously to make it more difficult for them to communicate amongst themselves and screw you over.

Another strategy that is now being employed, as people learn more about BTC OTC trading, is to call a single broker and ask them for both buy and sell rates for, say, 500 BTC. This makes it difficult for them to give you a poor rate and forces them to strike a fair balance between buy/sell rates.

Traders are also advised not to trade in excessively slow or volatile markets. OTC trading is a far more complicated and somewhat shadier market than that of the open exchange markets, although market manipulation affects both of them greatly.

With the onset of BTC markets such as Bakkt providing BTC exposure for regular stock traders as well as the slowly increasing regulation seen worldwide in the crypto markets we may be coming into a time where the price action will level off to become more stable – however, for now, the OTC markets continue stronger and more well staffed than ever.

If you didn’t know, you should now…Crypto is Coming.

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