Max Korpusov

Increasing Importance of OTC Trading Desks in the Crypto Industry

Cryptocurrency exchanges have long dominated the crypto market with the bulk of trading activities taking place on e-wallets and centralized exchanges. Nonetheless, the role of OTC (over-the-counter) trading desks in the crypto industry has been on the rise, providing easy access and greater liquidity for institutional investors and large organizations.
Although obtaining accurate data on OTC trades is challenging, the top OTC desks have reported explosive growth in volume, highlighting their increasing importance. In this article, we will detail what OTC trading desks are, how they work, and the advantages they provide for investors. We will also analyze the potential of OTC trading desks in developing innovative financial products such as options, futures, and derivatives.

Crypto OTC Role in Institutional Investment

OTC trading desks are similar to traditional exchanges in that they enable the buying and selling of digital assets, but they differ in that they facilitate transactions through direct communication between buyers and sellers, outside of an exchange order book.
OTC crypto desks handle high-volume transactions from institutional investors, payment processors, and hedge funds looking to avoid the market impact that arises from executing large trades on traditional exchanges. They also provide anonymity to traders who prefer to keep transactions private.
Market makers play a significant role in OTC trading as they facilitate liquidity in the market. Market makers are firms specializing in providing liquidity and price for a digital asset, thus enabling quicker trades. These firms are essential, particularly in a market as dynamic as cryptocurrencies where prices can fluctuate rapidly.
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Source: FinchPay Website

Benefits of Using OTC Trading Desks

OTC trading desks offer several advantages over traditional exchanges, including:
  • Fixed pricing;
  • Anonymity;
  • Lower market impact;
  • Transaction fees compared to exchanges.
They also provide easy access to institutional investors who want to make large trades. Fast settlement times and flexible payment options make OTC desks an attractive option, especially for those looking to make a quick transaction. Additionally, some OTC trading desks have developed escrow services to protect investors against fraud or non-delivery.
Case studies have shown the advantages of using OTC trading desks. For example, in July 2019, the Grayscale Bitcoin Trust (GBTC) reported a $2.7 billion weekly trading volume on its OTC venue. This volume is equivalent to 24% of the total spot market trading volume of Bitcoin on traditional exchanges. The GBTC’s OTC trading desk has also reported an increase in the number of institutional investors who prefer making large trades via OTC trading desks.

Challenges Associated with OTC Trading Desks

Despite the benefits of OTC trading desks, there are specific challenges associated with them.
One of the significant challenges is obtaining accurate data on OTC trades, making it hard to measure trading activities. Furthermore, OTC trades are not reported or audited independently, meaning that traders may operate outside regular exchange rules.
OTC trading desks also lack regulation, which is a significant problem, considering the potential risks associated with cryptocurrencies. Greater scrutiny and regulation would provide investors with more confidence and protection, attracting more institutional investors. Additionally, the lack of regulation leaves investors vulnerable to scams and financial frauds, which have become common across the crypto market.

Future of OTC Trading Desks

OTC trading desks have immense potential in the crypto industry as more institutional investors enter the market. The increasing number of exchanges launching their OTC platforms indicates the growing interest in OTC trading desks. The potential for OTC trading desks in the market is enormous, given their ability to provide greater liquidity and ease of access for institutional investors and large organizations.
As the crypto market continues to mature, we can expect to see more advanced financial products such as futures, options, and derivatives being launched via OTC trading desks. Cryptocurrencies have their uniqueness, and OTC trading desks provide these benefits to those who need more customized services, including those who want to trade larger volumes without affecting the spot market prices.

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