Understanding the functioning of an OTC Crypto Exchange
Over-the-counter (OTC) trading also plays a major role in the burgeoning cryptocurrency market. It handles gigantic trading volumes with high efficiency.
In an OTC, the trade occurs directly between two interested parties eliminating the need for a middleman. Unlike exchanges where the middleman is necessary, OTC enables parties to settle transactions among themselves. No quarrels occur during fixing of price, and the entire process gets completed smoothly. Only the desk that handles the business operations will know details such as the price and the trading volume. It operated in a decentralized manner without a physical location.
How trades occur in an OTC Crypto Exchange
Parties can trade a cryptocurrency for another cryptocurrency (like swapping Bitcoin with Ethereum). Another way would be trading fiat currency for cryptos (like exchanging US Dollars or Euros with Bitcoin and vice-versa). Both individuals, as well as institutions, can participate in trading through an OTC Crypto Exchange.
Advantages of OTC Crypto Exchange
- It helps in solving issues and glitches that occur when cryptocurrencies are bought and sold in large amounts.
- In the case of big deals, negotiations will have to be held with multiple sellers. Initially, the cryptos can be bought at the best market rate. But, the final set of cryptos may be purchased for a higher price due to slippage. OTC Crypto Exchanges avoid the occurrence of slippage by spreading the purchase process across multiple exchanges.
- The best price would be obtained by getting small buyers in each exchange though a lot of time will have to be spent along with incurring transaction fees.
- Sometimes, OTC Crypto Exchanges can get access to a large amount of cryptocurrency at once with their wide-ranging network. This will help in saving time and expenses for clients.
- OTC Crypto Exchange helps smaller companies that face difficulty in complying with the stringent listing requirements of exchanges.
Limitations of OTC Crypto Exchange
- Every trader must be aware of suspicious transactions that take place, especially during incidents of hacking.
- Trusted intermediaries must be hired for executing deals. Intermediaries that boast about huge amounts, and inflate the number of successful projects completed should not be given any chance.
- Having contracts with dubious intermediaries can lead to the occurrence of frauds and phishing on the platform.
- Investors can safeguard their funds by cancelling suspicious deals.
Grasping the nuances of a Principal Desk
- Every interested buyer would request a quote for the rate through a chat application
- Any trader of the desk will respond with a price fixed after taking into account the current market conditions
- This will be accepted, countered, or declined by the other party.
- If the price is accepted, the trader is obliged to deliver the required amount of cryptocurrency at the fixed rate as per a legal agreement signed during the process of on-boarding.
- If there is a large amount of cryptocurrency involved, the desk will network with other leading exchanges and OTC service providers.
- Care must be taken to source the cryptocurrency before any changes in its price
- The desk will make profits by pocketing a difference between the average price used for buying and the average price involved in selling. That gap is known as a spread.
- Once the required cryptocurrency has been sourced, clear instructions will be sent to the buyer for the method to transfer the funds.
- The cryptocurrency will be delivered once the funds have been received by the desk in either fiat or cryptocurrency
- In big deals, the buyer must ensure that he gets into touch with reputable principal desks that have executed several projects.
Knowing how an Agency Desk operates
- There is less market risk involved compared to a Principal Desk as they do not deal with any funds.
- The Agency desk acts as a middleman. They make money by charging fees from counterparties to strike favorable deals.
- A buyer must create an account and disclose the range of prices at which he is ready to purchase.
- The Agency desk fulfills the deal by acquiring the needed cryptocurrency at the agreed price.
- Buyers can face risks regarding the hike in price if the agency desk is slow in completing the order.
- Recently, many custodian services that store cryptocurrencies turn into agency desks by offering to buy and sell digital assets for clients.
The sources of demand for an OTC Crypto Exchange
- Parties with high financial prowess such as high net-worth individuals, financial institutions, hedge funds, and venture capitalists are the main clients for an OTC crypto Exchange.
- They buy and sell large amounts of cryptocurrency in their trading activities.
- In rare cases, two OTC desks may execute a transaction between each other if they possess an interested buyer and seller.
- Project managers are also increasingly using OTC desks to convert cryptocurrency into fiat currency.
- Cryptocurrency miners also pay their daily expenses by utilizing the operations of OTC desks
- Leading cryptocurrency exchanges also use services of OTC desks to convert their collected fees in cryptos to local fiat currencies.
What lies in store for an OTC Crypto Exchange
While Bitcoins have reigned the digital world for more than a decade as a spearhead for virtual currencies, OTC Cryptos are witnessing increasing growth now due to the illiquidity of some cryptocurrency exchanges. With the rise in the number of cryptocurrencies and variety of digital assets, the prospects are bright for OTC cryptos. By handling volumes worth billions of dollars, it not only keeps fulfilling different trades but also ensures that the market is moving actively.