How does crypto OTC actually work?

What are OTC markets?

There are two basic ways of organizing financial markets — exchange and “over the counter”, or OTC.

What is crypto OTC?

Crypto OTC is simply the trading of crypto assets directly between two parties. A trade can be crypto-to-crypto (swapping Bitcoin with Ether for example) or fiat-to-crypto (swapping US dollars for Bitcoin and vice versa).

Why do crypto OTC desks exist?

Mainly, because buying or selling large amounts of crypto is difficult. For example, If you were to try to buy 500 BTC you would run into a host of issues.

How a principal desk works

Principal is derived from the term, “principal risk.” When you trade with a principal desk, they use their own funds to purchase whatever asset you are buying, assuming risk in the process. This is the model employed by Circle Trade.

The agency model

There is a second type of OTC desk called an agency desk. Contrary to a principal desk, agency desks do not trade with their own funds and thus, do not assume market risk. Instead of a spread based model, agency desks charge a fee to act as a middleman to broker a deal on behalf of a counterparty.

Who trades crypto OTC?

Simply put, anyone who wants to quickly and easily buy or sell large amounts of crypto. This can be high net worth individuals, institutions, VC and hedge funds that invest in crypto markets. OTC desks also frequently trade with each other, when for example, one desk has a counterparty looking to buy a particular asset and another desk has a seller.

The future of crypto OTC

Five years ago, crypto OTC desks did not exist with the structure and scope that they do today. Now there are multiple desks operating on a global scale, trading billions of dollars a year — a reflection of how much this industry has grown since the bitcoin network launched ten years ago.



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