OTC stands for Over The Counter and is a term we see recurring a lot within the crypto market. Yet this term originally comes from the traditional market. OTC trading is also done within the stock market, and it is mainly the forex market (trading in fiat currencies) where most OTC trades take place. In this article, however, we will talk about OTC trading for cryptocurrencies.
We will explain to you in this article what OTC trading is and how it works. We will also discuss how OTC trading affects the market volume of a crypto market. Indeed, OTC has certain characteristics that allow it to exert a different influence on the entire crypto market.
Table of contents
What is Over The Counter (OTC) trading?
Over The Counter trading, or also called OTC trading, is the trading of products out of sight of the market. A crypto currency is then not traded on the crypto exchange, but instead directly between the buyer and seller. This way of trading is less transparent, so there is also less regulation than trading through a central crypto exchange.
In OTC trading, the selling party usually charges different prices for the cryptocurrencies than if they were sold through a crypto exchange. For example, the seller can offer a discount when a large number of crypto coins are purchased. This then also works to the advantage of the buying party, as they can buy crypto at a lower price.
An important feature of OTC trading is that it takes place without the market realizing it. Only after the trade is made is it made public. After all, the blockchain can see between which addresses crypto is sent. OTC trading often involves large amounts of cryptocurrencies, which is why these types of trades get noticed fairly quickly when executed on the normal market.
Advantages of OTC trading
OTC trading has a number of advantages for different parties involved.
- A selling party can more easily get rid of large amounts of cryptocurrencies through OTC trading because special prices can be offered.
- Buyers can purchase cryptocurrencies at attractive prices, as lower prices often apply when purchasing large quantities of crypto coins.
- Traders are not dependent on the rules in place on a crypto exchange because they make the transaction outside the platform.
- No transaction fees need to be paid to the crypto exchange on which cryptocurrencies would normally be sold.
- OTC trading attracts no attention making it ideal when dealing with large amounts of cryptocurrencies.
- A transaction made outside the public market will not cause people to sell their coins out of panic, or, on the contrary, buy new coins due to fear of scarcity.
Disadvantages of OTC trading
Although OTC trading has several advantages, there are also some disadvantages to this method of trading.
- The chance of scams is higher because there is no middle party (crypto exchange) managing and controlling the transaction. Therefore, you have to trust the buying or selling party.
- Transactions made in OTC trading are not disclosed until afterwards. This means that other traders cannot adjust their strategy according to the trade being made.
How does OTC trading affect the market volume of a cryptocurrency?
An OTC sale takes place almost exclusively when large amounts are involved. For example, consider a transaction of 500 Bitcoins. At the time this sale takes place behind the scenes, the market does not notice that someone is purchasing a large amount of Bitcoin. When it does, it can affect the price of Bitcoin. This is because there is then a good chance that more people will want to buy Bitcoin, as the demand for Bitcoin increases.
This means that the market volume in OTC trading will not increase more than the increase directly caused by the OTC transaction.
Consequences of selling on crypto exchanges
The influence of OTC is perhaps better understood when we look at the influence of a sale that takes place on the crypto exchange. After all, this is and always has been the most common way to buy and sell cryptocurrencies.
The moment someone wants to buy a large number of Bitcoins, the market will notice immediately. This is because everyone can see when an order of, say, 500 Bitcoins is placed. This might cause people to want to buy Bitcoins quickly as well, which might cause the person who placed an order of 500 Bitcoins to miss out.
In general, crypto traders look a lot at what other traders are doing. In fact, there are several tools that can be used to detect such "whales. So it is not difficult for crypto traders to find out more about such trades. This ensures that they can be influenced by another trader's action, which also affects the cryptocurrency's market volume.
Also, when a trader sells a large number of crypto coins on an exchange, it can have a big impact on the crypto currency's market volume. People will take notice that a whale has put a large amount of coins up for sale, after which they will panic and put their own coins up for sale.
Conclusion
OTC stands for Over The Counter, and means that a transaction takes place out of sight of the market. So crypto coins are not sold on a crypto exchange, but directly between the buyer and seller. Often special prices are offered for OTC trading, because large amounts of crypto coins are involved.
There are several advantages to OTC trading of cryptocurrencies. For example, it is convenient to execute a transaction OTC because otherwise the crypto market will notice that a whale wants to buy or sell a large number of coins.
It could cause traders to start buying coins themselves, leaving the whale empty-handed. Should a large number of crypto coins be offered on the exchange, it could cause a panic, causing a large number of traders to put their coins on sale as well.
OTC trading thus ensures that market volume is less affected by the fact that the transaction takes place out of sight of the market.
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