Crypto OTC desks play an important role in facilitating large cryptocurrency purchases and sales.
Read on to learn what crypto OTC desks are, how they work, and why they play an essential role in the global crypto markets.
This is partner content sourced from Laura Shin’s Unchained and published by CoinDesk.
Over-the-counter (OTC) trading desks facilitate trading between two parties without revealing information about the trade to the public via an exchange orderbook or otherwise.
The OTC desk acts as a matchmaker enabling high-volume transactions between buyers and sellers. During an OTC trade, the two parties agree on a purchase price before they can complete the transaction. The trades can be crypto-to-crypto or fiat-to-crypto.
OTC desks differ from traditional exchanges in terms of transaction transparency. A crypto exchange like Kraken or Binance acts as an intermediary between buyers and sellers. Transactions are executed via an orderbook for everyone to see.
Conversely, crypto OTC trading is relatively opaque since no one beyond the transacting parties is aware of the price and volume of assets being traded. Moreover, OTC trades are typically insulated from wider market fluctuations that occur on exchanges.
There are two types of OTC desks: principal and agency.
Principal desks assume the risk to the buyer by using their funds to purchase whatever asset the buyer requires. For instance, a bitcoin whale looking to make a large bitcoin purchase will request a quote from the OTC desk, and they will respond with a price based on prevailing market conditions.
The buyer can choose to accept the offer or make a reasonable counter. Should the buyer accept the proposed price, the OTC desk is responsible for sourcing and delivering the BTC to the buyer as per the legal contract signed beforehand.
Agency desks, on the other hand, don’t assume the market risk since they don’t put up their own money for transactions. Instead, they act as an intermediary to broker a deal on behalf of the buyer. They will charge a brokerage fee for this service.
Crypto OTC desks exist to enable large investors, such as early adopters, high-net-worth individuals, and institutional investors, to buy and sell large amounts of cryptocurrencies without alerting the market about their intention or transaction.
If you try to buy 1,000 BTC on a regular crypto exchange, you will run into several problems. A key challenge is that the chances of finding someone selling that amount at any given time on a single exchange are slim.