Cryptocurrency trading has evolved significantly from its days of peer-to-peer transactions. Today investors have options for buying and selling assets including traditional exchanges and over-the-counter (OTC) trading desks.
OTC Trading Advantages
Privacy and Confidentiality:
OTC trading enables investors to keep their trading activities discreet while avoiding any impact on the market. This aspect holds importance for net-worth individuals and institutions who value conducting transactions privately.
Flexibility in Trading Pairs and Volume:
OTC trading desks offer greater flexibility regarding available trading pairs and transaction volumes. This allows investors to buy or sell assets that may not be readily accessible, on exchanges.
Less slippage:
OTC trading desks work directly with liquidity providers and market makers. This results in less exposure to Slippage when trading on OTC platforms.
Disadvantages of Over The Counter (OTC) Trading
OTC trading is not suitable for small traders and the trader must independently find and verify a reliable broker.
A higher level of settlement risk (risk associated with non-execution or delayed execution) compared to cryptocurrency exchanges.
Counterparty risks – the risk that the other party will not fulfill its obligations.
Key Differences Between OTC and Exchange Trading
Transaction Costs
On exchanges trading fees typically average around 0.2%. Transfer and withdrawal fees make up about 0.1% of the transaction value. However OTC exchanges do not have these commissions since transactions are conducted directly through them.
Moreover exchanges impose restrictions on transaction amounts, which results in commissions for transactions.
OTC venues charge a fixed rate ranging from 0.35% to 0.4% of the transaction amount providing fixed prices and safeguarding against market volatility for transactions.
In terms conducting cryptocurrency trades on exchanges can lead to substantial costs. Therefore OTC venues are preferred for transactions due to their fixed rates and protection against market fluctuations.
Slippage and Liquidity
When executing market orders on exchanges trade outcomes may differ from expectations due to changes in asset values during execution. Additionally large trades on exchanges can impact asset liquidity. Potentially alter its value. This gives rise to concerns regarding slippage and liquidity effects. Conversely OTC desk trades offer fixed prices. Mitigate these concerns.
Market orders execute at the prices, on exchanges, which can result in slippage occurring.
OTC trades have pre-agreed fixed prices, independent of market movements, eliminating liquidity and slippage worries. This is made possible by the fact that OTC brokers ensure that trades are executed at agreed prices, bypassing liquidity and slippage considerations.
Custody and Ownership
When you place crypto assets on an exchange, there is a technical transfer of ownership where the exchange assumes responsibility for the safety of your funds.
History shows that exchanges are less favorable for large trades because of the risk of exchange hacking or other malfunctions such as unexpected exchange closures.
OTC desks enable ownership throughout the trade, with instant exchange that allow continuous ownership during trades, though investor caution is vital.
KYC
KYC process varies across exchanges and OTC desks, requiring ID submissions and sometimes a photo with identification.
Additional documents might be necessary based on exchange/OTC policies and investor type.
OTC desk identity verification is more comprehensive due to large trades exceeding $100K, involving checks, documentation, and potential interviews.
OTC desk trades often involve family offices, fund managers, or businesses, with thorough matching to trading needs and the desk’s network.
To summarize, both OTC and exchanges have differences and are suitable for different trading purposes when investing in cryptocurrencies. When it comes to infrequent and high-volume transactions, OTC exchanges will be more favorable due to the lack of slippage risk, fixed fees and more stringent KYC process.
