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Over-the-counter (OTC) crypto trading authorizes individuals to trade large cryptocurrency volumes without any exchange.
The involvement of the third party in trading and investment creates issues related to settlement time, security, and liquidity. The concept of OTC crypto trading was introduced to resolve such concerns. In OTC crypto trading, two parties can trade or exchange cryptocurrencies without any involvement of the third party.
What is OTC Crypto trading?
OTC crypto trading is somewhat different from other forms of trading as it involves crypto brokerage firms. The trade is finished in Crypto-to-crypto or fiat-to-crypto, depending on the needs of both parties.
The trade executes only when both parties agree on the trade price or exchange. To do so, the trading parties require a trading market or desks to deal directly with the crypto buyers or sellers.
Buying or selling large volumes of crypto is challenging and requires multiple sources, which creates a slippage situation. Trading markets or desks are used to avoid such situations and facilitate better trading.
Principal and Agency Desk Models
Principal and Agency are two desk models for crypto trading that safeguard buyers and sellers from slippage situations. Let’s understand the model in detail.
Principal Desk: The principal desk considers the risk to the buyers by utilizing their investment to buy whatever asset the buyer needs. It depends on the buyer to accept or reject the proposed price. Additionally, the desk is accountable for sourcing and delivering the digital assets to the buyer.
Agency Desk: The Agency desk operates as an intermediary to make a deal on behalf of the traders or investors. Such desks don’t consider the market risk as they don’t invest their own money in transactions and charge a brokerage fee.
Furthermore, transactional privacy, mitigation of price volatility, and price negotiations are some benefits of using a desk, whereas counterparty default risk is a drawback.
The complete working
It is the trading of securities between two parties without using a formal exchange or a user interface, which is typical for regular exchanges. The trades usually happen through trust, where a demand is posted, a price is offered, negotiations are made, and then finally, upon consensus of all parties, the deal is made.
Sometimes, only one person acts as a middleman, and when it comes to larger amounts, an agency may take over the task of connecting buyers and sellers. Agencies enabling trading also have their reserves to ensure quick liquidity in fiat and other major cryptocurrencies.
The process of signing up for the trading is simple but also complex. Simple because many agencies are available across regions, but complicated because it all depends on trust. One should be able to trust someone with vast amounts of crypto, not to scam an individual. Luckily, many mainstream crypto exchanges offer a desk that allows individuals to trade large amounts of crypto without hassle.
Strategies to consider
Individuals can use a variety of trading techniques for cryptocurrency exchange. A few of the strategies to consider are as follows:
Arbitrage is one of the effective strategies an individual can use, which uses pricing differences between different platforms and open exchange. The strategy allows individuals to buy assets at a lower price on one network and sell them at higher value on another platform.
Another effective strategy is portfolio diversification and hedging strategies that decline market volatility to manage the risk. Using derivatives contracts helps mitigate risks related to unfavorable price movements.
Strategic timing is another approach. Individuals can use the correct timing of entering and exiting the market. Keeping an eye on the news events and market patterns will help individuals make a profitable game.
Advantages of OTC Crypto trading
There are several reasons to use the respective trading strategy.
Better liquidity: Better liquidity is one of the significant advantages of the trading type. Mostly, crypto exchanges hold limited liquidity, which creates the chances of slippage and may result in higher trading costs. Banks and exchanges that offer such types of crypto trading have access to pools of liquidity that ensure large trades at the best possible price.
Faster settlement: Trading and investing through an intermediary may result in slow settlement times due to high trade volumes and confirmation time. This scenario differs from the respective crypto trading strategy as it offers much faster trading within a few hours or less.
Top-notch security: security is one of the major concerns in the crypto world and enhances the chances of cyber-attacks and hacks. The particular trading strategy offers multi-factor authentication, cold storage, and insurance to provide top-notch security.
Fixed price: market volatility is a common issue in the crypto world, which makes executing large trades at fixed value somewhat challenging. Crypto trading, on the other hand, offers trading options on fixed prices and mitigates the risks associated with price slippage.
Regulatory oversight: banks or desks offering Over-the-counter trading are regulated by financial authorities and adopt strict compliance standards. Regulations, thus, maintain transparency and fairness as well as safeguard individuals from any kind of hacks and cyber crimes.
Things to consider while doing trading
After knowing the concept and benefits of such a type of trading, one must be interested in using the trading strategy at least once. Here, an individual needs to keep a few things in mind while applying for trading.
- The minimum trading limit for retailers is 50,000USDC, whereas for institutional users, the trading limit is 100,000USDC.
- Individuals must submit 1 quote request every 10 seconds with a maximum quote limit of 5,000,000 USDC.
- The trading approach applies to virtual assets only.
Conclusion
Traders and investors looking for safe, faster, and better liquidity crypto trading can choose the OTC trading option. The concept permits traders to exchange digital assets with another party without involving a third party, like crypto exchanges. Brokers, banks, or desks like Principal and Agency desks are operated and regulated by financial authorities, ensuring top-notch securities.
FAQs
How does OTC trading work?
The trading involves a broker-dealer network that helps individuals exchange or trade digital assets in a faster and safer way.
What are some examples of an OTC market?
Derivatives, foreign currency, and advance-decline ratio (ADR) are some examples.
Andrew is a blockchain developer who developed his interest in cryptocurrencies while pursuing his post-graduation major in blockchain development. He is a keen observer of details and shares his passion for writing, along with coding. His backend knowledge about blockchain helps him give a unique perspective to his writing skills, and a reliable craft at explaining the concepts such as blockchain programming, languages and token minting. He also frequently shares technical details and performance indicators of ICOs and IDOs.
