Most people believe you can only trade through centralized exchanges. However, this is not the case with OTC crypto deals, as you can do it directly with the other party. The terms of exchange are different since they do not have to follow the rules of an exchange system. Traditionally, OTC deals were for asset type socks like unlisted stocks and penny stocks. OTC crypto trading is where parties can trade cryptocurrencies directly without the use of exchange systems.
For much of the past decade, Crispin Odey has been waiting for inflation to rear its ugly head. The fund manager has been positioned to take advantage of rising prices in his flagship hedge fund, the Odey European Fund, and has been trying to warn his investors about the risks of inflation through his annual Read More
There are some advantages and disadvantages to crypto OTC trading. Keep reading to see what they are.
Advantages Of OTC Deals
- No trading limit: Digital Asset Exchanges limit how much you can trade. However, OTC crypto trading does not limit your trading volume. You can trade as much as you want without being tied down.
- The price rarely slips: When using exchange systems, the expected price differs from the actual price. In OTC crypto deals, the price is predetermined. Also, both parties enjoy a period where the price is locked in. That means the indicated price will be the trading price.
- Confidentiality and anonymity: OTC crypto trading provides traders with anonymity, and the transactions are confidential. This helps traders keep their trades hidden from the public.
- High pair availability: When trading using cryptocurrencies that are not well known, OTC trading can allow you to trade larger volumes. The volumes are larger than those on public exchange systems.
- Traders are verified: OTC crypto trading platforms allow traders to verify their identity. They showcase their wallets to show they have the funds to transact. Traders can also see information on their trades and insurance. This reduces the risk of getting conned.
Disadvantages Of OTC Crypto Trading
- The fees are considerably higher compared to those of exchange systems.
- While the volume is not capped, you need to reach the minimum order amount to trade successfully.
OTC Crypto Trading Risks
Like other types of trading, crypto trading has its risks listed below.
While you can trade higher volumes, there are times the market does not have buyers or sellers. This is the case especially for new crypto that are not well established. You find that there are stocks but no buyers or sellers. This makes it dangerous for traders who end up going back to central exchanges even at the risk of getting lower prices for their assets.
To protect against this, traders should do their research on assets before choosing to invest. A cryptocurrency might have potential, but it will not be beneficial if no one wants to invest in it. You will end up being stuck with your assets.
Another risk in crypto trading is counter-party risk. This is where you find a party defaulting before the deal is completed. It also occurs when one party fails t make current and future payments as indicated by the contract. This breach of trust can have devastating effects to OTC crypto markets. Serious traders will opt not to use OTC markets due to the risk involved.
To protect traders against this, desks can be used. Agency desks require traders to pay a fee for them to act as middlemen. In case there is a breach, the agency will cover any losses and the deposit paid by the breaching party is retained. This encourages transparency and prevents scam traders from disrupting the market.
Also, a thorough check is done where a trader’s history is indicated. The other party needs to check the trader’s information before they make a decision on whether to trade. There is a fine imposed upon the party who fails to honor the contract. Clearing houses and escrows also help by holding the funds and securities until the contracts are fulfilled.
Where OTC Deals Are Settled
If you want to start buy or sell crypto Over-The-Counter, you need to know where to start. There are several platforms where OTC crypto trading occurs. They include:
- Trading Firms: Here, you get personalized treatment, and you can reach high-volume traders easily. To avoid slippage, they have access to large volumes of liquid cryptocurrencies.
- Chat rooms: Chat room transactions were common when cryptos entered the market. Though they are not as popular, they are mainly for peer-to-peer transactions.
- Dark Pools: These are private exchanges that are only accessible to a target market. Large volume traders can transact independently and have their transactions remain anonymous.
- Crypto OTC Desks: These are platforms that deal with crypto buyer and sellers directly. They can purchase assets upon customer request or wait for the customer to pay a fee for them to act as the middleman.
Crypto OTC Desks And Why You Need Them
Crypto OTC desks are platforms that deal directly with sellers and buyers. They can be agency or principal desk. Principal desks use their funds to buy assets according to customer requests. They assume the risk for their clients. Agency desks do not take on this risk. The customer has to pay a fee to allow the desk to act as a middleman. There are three main reasons to use OTC desks. These are:
You can make crypto trades that have high liquidity. You also minimize the risk of price fluctuations since there is a time hold where the price remains constant. Also, there is confidentiality when desks are involved. The chances of having a third-party interfere with your transaction is low. You can trade confidently knowing that your transaction will remain anonymous.
OTC desks empower buyers and sellers to interact with each other directly. A trader’s profile is given so both parties’ can verify each other’s identity. Using desks eliminates the chance of scam traders interfering with the trades. By having direct transactions, buyers can trace sellers.
If you are new to crypto trading, you might be torn between using an exchange system and OTC trading. If you have large volumes to trade and feel restricted by exchange systems, your best choice is OTC crypto trading. That way, you have a better chance of having your order fulfilled in one go. OTC deals are one way you can get the price you want for your digital assets. Happy trading.