By Akeju Abiola
As crypto adoption continues to evolve and gain prominence, investors are increasingly exploring alternative avenues to navigate the dynamic market landscape. If you have ever wanted a better alternative to traditional exchange trading, this post is for you.
Picture the last time you had a meal at that fancy restaurant in your neighborhood. You walked in, ordered your meal from pre-existing stock, paid, and had a nice time. Now, instead of just going to the restaurant to order the meal, imagine you could call a private chef and carefully describe how you want your meal to look and taste; perhaps you want it to be stir-fried and garnished with enough ginger and onions, along with hand-juiced fruits. You carefully describe all this, and you get your custom order even faster than going to the restaurant.
That's how to describe exchange trading and OTC trading. Over-the-counter (OTC) trading plays a critical role in maintaining sanity in today’s market. Unlike traditional exchange platforms, OTC trading occurs directly between parties, which offers several advantages, such as increased liquidity, reduced price volatility, and improved privacy. As the cryptocurrency market continues to mature, it becomes increasingly important for investors to explore the significance of OTC trading to capitalize on the opportunities it presents.
Over-the-counter (OTC) trading is a method of fulfilling trading requests directly between two parties without having to go through a public exchange. This type of trading is often used to buy and sell large amounts of securities, currencies, and other assets that may not be listed on an exchange. OTC trading provides privacy, higher transaction limits, and a way to avoid market fluctuations. According to CNBC, OTC trading refers to trading via agencies or individuals that carry out transactions for you, isolated from regular exchanges. In simple terms, if you want to avoid purchasing, trading, or selling crypto via mainstream, highly regulated exchanges, you can opt for OTC trading.
Significance of OTC Trading
The importance of over-the-counter (OTC) trading in crypto cannot be overstated. OTC trading provides a way to trade large volumes of cryptocurrencies without directly affecting market prices, which is crucial in maintaining stability. For instance, if someone wants to sell $900,000,000 worth of Bitcoin, completing such a trade at once through a normal exchange could cause a market panic, leading to sell-offs by trading bots and human traders. This could result in a significant drop in the price of Bitcoin before anyone has the chance to ask why someone is selling such a large amount.
OTC trading also plays a vital role in the fight against money laundering in the crypto space. OTC firms are required by law to comply with extensive KYC or KYB procedures as well as anti-money laundering (AML) guidelines for businesses that use their services. This allows for more thorough scrutiny of businesses that conduct transactions using cryptocurrencies, which helps to identify and prevent any illegal activities. Overall, OTC trading is a safe and effective way to trade large volumes of cryptocurrencies while maintaining market stability and preventing illicit activities.
Risk Management in OTC Trading
Risk management is an essential aspect of trading in the Over-The-Counter (OTC) market. There are two main reasons why OTC trading is preferred to trading on exchanges.
Firstly, OTC trading minimizes price slippage. Slippage occurs when the price changes between the time a trader decides to buy or sell and the time the trade is executed. This is a significant issue in the crypto space due to the market's high volatility. OTC trading allows traders to lock in a price after agreeing to an entry price, and the trade is completed within a specified period.
Secondly, OTC trading mitigates market impact, which is a significant concern when trading on crypto exchanges. Even a small trade of $1,000 on an exchange can trigger a sell-off in the market based on the coin’s capitalization. This can be an issue for large corporations that want to hold a significant amount of crypto. For instance, if a multinational corporation decides to hold $1 billion worth of Bitcoin, buying it directly on an exchange could put significant buy pressure on the market, thereby raising the price. OTC trading allows traders to buy or sell crypto with minimal market impact.
Also, it allows for customized trading strategies, which enable the participants to tailor their trading approach according to their specific needs and market conditions. Unlike standardized trading mechanisms found on traditional exchanges, OTC trading allows for greater flexibility in executing transactions. OTC trading allows participants the freedom to negotiate terms directly with their counterparties, enabling the development of bespoke trading strategies that align with their investment objectives, risk tolerance, and market outlook.
Benefits of Over-the-Counter Trading
During the early days of the cryptocurrency market, over-the-counter (OTC) trading was the only available option for individuals to trade various cryptocurrencies, as the market was not very liquid. If someone was interested in purchasing a specific coin, they would express their interest in a chatroom, and others who held that coin would express their desire to sell. They would then meet and exchange the coin at an agreed-upon rate.
As the adoption of cryptocurrencies improved and exchanges became more popular, market-making algorithms were created, which resulted in order books similar to those used in stock trading. Traders could now directly trade cryptocurrencies using exchanges by fulfilling other people's orders in the order books. That said, even with the better and more efficient order books available today, some large-volume transactions would be impossible without OTC trading. Some types of coins with limited availability might require OTC trading. Additionally, many exchanges have trading limits on their spot platforms. Thus, OTC trading provides users with increased liquidity, allowing them to trade with more tailored preferences.
Reduced Price Volatility
When crypto exchanges first introduced crypto order books, allowing traders to trade directly on exchanges without intermediaries, they soon encountered a problem. Large-volume traders unintentionally caused high volatility in the market. This required an urgent solution, and soon transactions involving such large volumes were immediately referred to OTC desks. OTC trading enables cryptocurrencies to mitigate the highly volatile nature of cryptocurrencies. Transactions worth billions of dollars can be completed outside the traditional exchanges without impacting the market in any way.
Privacy and Confidentiality
Blockchain and cryptocurrencies are designed as transparent means of payment, meaning they come with limited privacy protections. It is sometimes possible to identify who filled trades by following the public blockchain. However, some traders value their privacy and prefer to remain anonymous. OTC trading makes this possible because it is usually handled privately and not publicly. Although the transaction will take place on the blockchain, it will not appear on the order books, as it will be two private parties sending coins directly to each other without passing through any exchange. This way, people can only speculate on the ownership of the wallets without knowing the specific person they are associated with.
Flexibility in Trade Execution
The flexibility that comes with OTC trading is often not talked about enough. OTC trading allows for a great deal of flexibility, which enables better risk management, improved liquidity, and the ability to customize trades. Additionally, OTC trading provides traders with the ability to source large orders and find counterparties. This improved liquidity also enables traders to access better prices and take advantage of arbitrage opportunities. Furthermore, OTC trading also reduces transaction costs, as traders can avoid having to go through exchanges.
CI Cryptosolutions OTC service
CI Cryptosolutions is a leading cryptocurrency exchange committed to providing top-notch services that prioritize security, efficiency, and privacy in all financial transactions. Its business model is designed to cater to the unique needs of your business, tailoring solutions that best align with your requirements.
Its remittance solution is an all-inclusive service that utilizes USD-backed stablecoins to ensure the safe and secure transfer of corporate funds, streamlining the entire process and providing smooth, efficient experiences for businesses operating globally.
CI Cryptosolutions offers more than just standard financial services; its OTC cross-border remittance service is designed to facilitate large-volume trades outside of traditional exchanges, providing competitive rates with minimal market impact, supported by a dedicated team that ensures fast, reliable, and transparent services that align with your unique requirements. Click here to start meeting your OTC needs with CI Cryptosolutions.
In conclusion, over-the-counter (OTC) trading is an increasingly important component of the cryptocurrency market, offering several benefits such as increased liquidity, reduced price volatility, and improved privacy. OTC trading allows for customized trading strategies, which enable participants to tailor their trading approach according to their specific needs and market conditions. Additionally, OTC trading provides a way to trade large volumes of cryptocurrencies without directly affecting market prices, which is crucial in maintaining market stability. Overall, OTC trading is a safe and effective way to trade large volumes of cryptocurrencies while maintaining market stability and preventing market manipulation.