While most investors use digital asset exchanges to buy and sell bitcoin, there is also another market where digital assets are traded. It is called the over-the-counter (OTC) market.
This piece will explain what OTC desks are, how they work, and why they play such an important role for large investors in the digital asset markets.
What is OTC Trading?
OTC brokers work with a network of customers to connect buyers with sellers. These connections can be made through online negotiations, but are often conducted over the phone. OTC desks are commonplace in the traditional financial markets, especially in the bond markets.
OTC trading in bitcoin works in a similar fashion, with a broker facilitating the negotiations between private buyers and sellers. The main job of an OTC broker is to find these buyers and sellers of bitcoin, and to connect them privately. That’s the biggest difference between traditional exchange-based trading and over-the-counter trading.
OTC trades are conducted privately without the use of a public order book. This provides privacy to the clients, but it also allows for the movement of large amounts of bitcoin without disrupting markets or moving the price of bitcoin excessively.
Why OTC Trading Makes Sense
Even on the largest cryptocurrency exchanges, liquidity can be volatile, or just plain inadequate, making it very inefficient for the exchange of large amounts of bitcoin.
When a large order hits the books of a centralized exchange, there’s not much chance for it to get filled at the requested price. Instead, these large orders are often broken up into smaller orders, with each filled by a different counterparty. Continue reading…