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Cryptocurrency Trading Firms Look To OTC



De Silva

To avoid the risks of exchange hacks and price slippage, some wealthy cryptocurrency investors are turning to firms that facilitate over-the-counter (OTC) trade.

If I asked the average person to buy some bitcoin, chances are good that they would search "buy bitcoin" on Google. In an instant, they would be bombarded by advertisements for various cryptocurrency exchanges – Coinbase, Bithumb, bitFlyer, and so forth. Additionally, they might stumble across some questionable looking bitcoin ATMs.

However, one would have to dig deeper to find a third way of buying cryptocurrency: OTC trading.


"OTC" stands for "over-the-counter." The term is perhaps more familiar in a pharmacy context. For example, Tylenol is an over-the-counter (non-prescription) drug.

It's a little bit different in the financial world. Here, OTC trading refers to buying and selling that occurs outside of commodities or stock exchanges (e.g., the New York Stock Exchange).

"Institutions and broker dealers don't necessarily want anyone to know what their trading strategies are. When large institutions or brokerage firms attempt to make block trades on an exchange, the market may react in such a way that pushes prices in a direction unfavorable to the institution or firm," says FINRA.

The self-regulatory organization goes on to explain, "When an institutional investor is making a large trade (think thousands of shares), they sometimes prefer to do so over the counter."

In the cryptocurrency world, OTC trading plays a similar role.

Exchange-Based vs OTC Cryptocurrency Trading

Say, for example, that Alice wanted to buy 200 Ether at $400 per unit. That's an $80,000 order.


Alice could try to make her purchase through an exchange, but some platforms may not have sufficient liquidity to support her order. In other words, there might not be enough people selling Ether for $400 (or less) for Alice to complete her purchase.

If Alice places a market order (an order to buy or sell immediately at the current price) on a cryptocurrency exchange, she might also encounter slippage. This happens when the executed trade price deviates from the expected price. Malicious traders might even design strategies to take advantage of price discrepancies when a large buyer or seller (like Alice) enters an order.


Instead of visiting a cryptocurrency exchange, Alice may seek the assistance of a cryptocurrency trading firm. These companies connect large cryptocurrency buyers and sellers, deducting a commission for the service.

For example, to process Alice's trade, Firm ABC might connect her with Bob, a bitcoin whale.

Note: A bitcoin whale is a person or group that owns a large amount of bitcoin.

By transacting with Bob via Firm ABC, Alice is guaranteed price certainty.

She knows that she will be able to make her purchase at $400 per Ether without impacting the overall market liquidity. Even if Firm ABC charges Alice a commission, it could be worth her time and money to get the deal done.

Another advantage offered by OTC cryptocurrency trading is that it ostensibly avoids potential hacks. When an institution holds a large amount of cryptocurrency, it becomes an obvious target. One OTC trader said that high-profile exchange hacks help increase business for cryptocurrency trading firms, according to Reuters.

However, the hacking risk isn't entirely eliminated and OTC trade still suffers from other issues, including opaque price discovery (essentially, how buyers and sellers in a marketplace determine the going rate for an asset). 

Another difficulty (or necessity, depending on your point of view) is that market participants must submit to KYC and AML compliance checks by brokers. Last month, the Treasury Department released guidance explaining that its Office of Foreign Assets Control may add specific digital currency wallet addresses to its Specially Designated Nationals List. Of course, US-based cryptocurrency brokers (including OTC trading firms) would need to abide by these legal restrictions.


OTC cryptocurrency trading has been going on for years.

A spokesperson for the Chicago-based DRW trading firm said that Cumberland trades 25-30 different cryptocurrencies. Genesis Global Trading (which is registered with the SEC as a broker-dealer) handles seven cryptocurrencies, while Circle apparently trades a "very limited" range of digital assets.

As prices have reached a threshold, regulators have become increasingly attentive to the cryptocurrency markets. Although OTC trading relies on bank wires and mainstream communication channels (e.g., Skype), there are apparently no reporting requirements or independent audits for this slice of the cryptocurrency industry.

Only time will tell how digital asset exchange and regulation will evolve.

Matthew De Silva

Matthew has a passion for law and technology. He graduated from Georgetown University, where he studied international economics and music. Matthew enjoys biking and listening to tech podcasts. He lives in Los Angeles.

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