Although most investors go through an exchange or brokerage to trade, you don’t have to use these common and traditional channels. Instead, you can engage in over-the-counter (OTC) trading. But what exactly is OTC trading? More importantly, what benefits does it bring to investors?
An OTC crypto trading platform is one of many tools that have been developed as part of efforts to decentralize the global financial system and bring greater sophistication to crypto trading.
Crypto OTC trading platforms allow you to trade assets with other investors with much less oversight from third-party entities. This platform can be an independent exchange office or a decentralized exchange. The primary purpose of this device is to bring two parties together to facilitate an exchange. In some cases, the OTC trading platform cannot even take direct custody of the assets.
Although OTC platforms act as intermediaries, they often collect little or no personally identifiable information. Additionally, exchanges and trading desks allow you to trade efficiently while paying minimal fees.
How do Crypto OTC trading platforms work?
OTC trading platforms connect you directly with another investor willing to take the other side of your trade – there is no traditional exchange needed to arbitrate the trade or hold funds in custody. You can exchange crypto for crypto or transfer money directly from your bank account to theirs.
OTC crypto trading is primarily designed for parties who want to trade large amounts of cryptocurrency. But pretty much anyone can trade OTC crypto.
How does OTC trading differ from other forms of crypto trading?
The main difference between other crypto trading options and OTC trading is that the latter involves the exchange of large amounts or asset values directly between parties. Other trading routes may have restrictions that may delay trading and cause investors to incur additional costs charged by an exchange acting as an intermediary.
Another important difference is that there are generally no trading volume limits with OTC trading. This allows investors to trade large amounts of a single cryptocurrency more profitably, which might not otherwise be possible on a traditional exchange where the necessary high levels of liquidity may be lacking.
Who does OTC trade for?
Over-the-counter trading is essential for traders who need to trade on a large scale. Crypto exchanges may offer OTC facilities through an internal OTC trading desk. These offices are used exclusively for over-the-counter transactions, so small retail investors often do not reap the benefits.
By using an OTC trading desk, exchanges can direct large trades away from the main platform. This, in turn, helps the exchange maintain sufficient liquidity for retail investors while allowing them to accept large trades.
OTC trading desks are primarily used by private wealth managers, high net worth individuals and hedge funds. However, other investors can participate in OTC crypto trading using peer-to-peer (P2P) marketplaces. Binance is perhaps the most well-known P2P marketplace, but a few others include Paxful, Gemini, and HODL.
3 Advantages of OTC trading
OTC trading offers several distinct advantages over traditional alternatives, including:
The federal government has taken steps to strengthen regulation of the cryptocurrency industry. This should come as no surprise as countless people have fallen victim to cybercrime while trying to engage in legitimate crypto transactions.
While it is unclear what measures the government intends to take to combat cybercrime, there are precautions you can take to protect yourself. Engaging in OTC trading is one such step.
OTC trading platforms offer more security and privacy than traditional exchanges. Transactions are more secure with fewer parties involved and you only need to provide minimal credentials.
2. Direct Transactions
Third-party entities often impose restrictions on cryptocurrency transactions, such as the amount of coins you can exchange in a single transaction. In addition, exchanges usually charge a fee per transaction; if you need to make several transactions within a complex transaction to buy the desired amount of cryptoassets, these fees are accumulated.
By going the OTC route, you can engage in direct transactions without such restrictions or excessive fees. You can buy as many cryptoassets as you want in a single transaction. This means that you reduce the total fee amount.
Traditional trading platforms are known for their low liquidity. In the crypto world, liquidity refers to how easily you can buy, sell, or trade assets at a given price. In an illiquid market, it is difficult to execute trades, especially if it involves a large amount of assets. As a result, the final realized price may move negatively against you.
OTC trading platforms are capable of generating high liquidity, which facilitates cryptocurrency trading. When you operate in a highly liquid market, it is also easier to cash out your assets. This gives you the freedom to access the resources you need when needed.
Should I use an OTC crypto trading platform?
If you want to do high volume crypto trading, you should strongly consider using an OTC crypto trading platform. Such a platform has high liquidity and superior security. These platforms also allow you to trade directly with other investors.
If you engage in low-volume trading, you can still reap the benefits of using an OTC platform. However, carefully check the legitimacy of the platform before making a transaction. Although these platforms offer exceptional anonymity, many of them also offer little protection against fraud.
Your best option may be to use a crypto broker like Caleb & Brown, as they pool liquidity across OTC platforms, centralized exchanges and decentralized exchanges, ensuring clients always get the best possible price on every crypto trade.
Want to learn more about the rapidly evolving cryptocurrency space? If so, we invite you to explore other Benzinga merchandise.
Frequently asked questions
Yes, you can buy crypto OTC. This can help you trade quickly and enjoy greater privacy compared to trading through traditional platforms.
In general, OTC crypto trading is safe and secure. However, some platforms are less secure than others. Always do your own research.
An OTC wallet is a third-party application used to conduct OTC transactions. The wallet stores your money or crypto assets and allows you to send them to another user in exchange for crypto or fiat currency.
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