What is Better a Crypto Exchange or OTC Trading?
Reports claim that in 2018, the OTC cryptocurrency market trade volumes were 2 to 3 times higher than the crypto exchange market trade volumes. According to the data presented by TABB, the capital market research firm, the Bitcoin trade volumes in crypto exchange markets were close to $4 billion per day. This means the OTC crypto market trade volumes were somewhere between $8 billion and $12 billion.
Over the last 2 years, the trade volumes in both markets have increased multi-fold. According to the March 2020 data, Bitcoin worth over $20 billion is being traded in the OTC markets every day. Eventually, crypto exchange development has witnessed rapid growth.
What is an OTC platform?
In any financial market there exist two types of traders — buyers and sellers. And then to organize these financial markets we need either an exchange or an OTC (Over the Counter).
The exchanges act as a mediator between the buyers and sellers to facilitate a trade. Firstly, the buyers and sellers post their orders in open order books. Secondly, asks (sell price) and bids (buy price) are mentioned in the orders. As soon as the ask and the bid match, the trade takes place. It is important to note that these trades happen publicly and the trades happening here can impact the market. More broadly, bitcoin trading exchange development follows this set up for trade.
On the other hand, OTC trading happens anonymously between counterparties directly. Generally, one of the two parties in an OTC trade is a desk. An OTC desk basically provides trade execution and settlement services. Interestingly, in OTC trades, the parties can trade both crypto-to-crypto and crypto-to-fiat. Only when the two parties come to a price agreement can an OTC trade be executed. As it is a direct medium of crypto exchange, the OTC market trades are always opaque and anonymous. No one except the involved parties has access to the details like price and volume of the trade.
Different types of OTC trading:
• Dealer, Trader — In this type of OTC trading, the dealer and trader are actually trading with their own money. Or they might be trading on behalf of someone via their own account. In such kind of OTC trade, buyers and sellers find each other through private, public, and broker-specific chatrooms. These chat rooms can be:
- Secure chat rooms hosted by brokers
- Skype chatrooms
- LinkedIn connects
• OTC Brokers — These are intermediaries who facilitate finding the buyers and sellers.
• Exchange OTC desks — Certain crypto exchanges run OTC desks and buy or sell huge amounts of cryptocurrency anonymously.
How does an OTC crypto desk function?
Generally speaking, an OTC crypto desk functions just like its traditional market counterpart. The OTC crypto desks are built-up in a way that they connect multiple liquidity providers. This enables the execution of huge amounts of crypto assets without actually moving the market.
- An OTC crypto desk maintains its own aggregated order book
- This book maintains details like orders from customers, inter-dealer liquidity, and multiple exchanges’ order books.
- An OTC desk is also capable of providing a lock-in-price. However, the price is locked in only for a certain period.
- The OTC trading platform development services ensure the desk is developed in a way that the slippage (the difference between actual executed and expected price) is avoided.
Pros and cons of OTC trading
It is the responsibility of a crypto exchange development service provider to ensure that the crypto exchange or OTC trading platform is secure and intuitive enough. However, both OTC trading platforms and exchanges have their own sets of pros and cons.
- Over-the-counter platforms are better suited for high-volume traders. That’s because the trades are anonymous and can impact the market price of crypto assets.
- Transactions are more private
- No exchange risk involved as the parties exchange the assets directly
- As the OTC platforms offer higher privacy and anonymity, the transactions fees are generally higher
- Some OTC desks might have a minimum order amount condition
- Settlement risk is involved
A couple of years ago, OTC desks did not exist. Today the demand for OTC trades has gone up exponentially. However, the infrastructure is yet to scale which leaves room for tremendous for OTC platforms.
If you are planning for OTC trading platform development, Antier Solutions can help. We offer customized solutions to build high-performance crypto exchange platforms fortified with institutional-grade security. Whether you need a white-label crypto exchange or want to build an exchange from scratch, we successfully cater to your needs with our mission-driven solutions.
Schedule a free demo of our white label crypto exchange solution or connect with our subject matter experts to share your needs for crypto exchange development.