Although crypto asset exchanges continue to dominate headlines, over-the-counter (OTC) trading desks have begun generating ample press.

Despite challenging market conditions throughout 2018, many newcomers and incumbent exchange platforms have announced their foray into OTC trading. However, because OTC trades are not reported and independently audited, accurate data remains elusive.

As such, feedback from company representatives and emerging news stories remain crucial sources of market information. According to Digital Assets Research and TABB Group, the OTC market handled approximately $250 million to $30 billion in trades per day in April last year. In comparison, crypto asset exchanges facilitated about $15 billion in daily trades over the same period. Although these figures provide a starting point, the immense spread in daily trading volume necessitates a look at the bigger picture.

Chart showing OTC index value over two year
Source: Bloomberg

For instance, Reuters reports that some dealers often handle more than $100 million of crypto asset trades daily with minimum ticket sizes between $75,000 and $250,000.  Further, prominent OTC desks such as Circle, Genesis, and Cumberland continue to report explosive growth in trading volume. With these trends in mind, the growth of OTC trading is hard to deny despite disjointed market data. However, the question remains, why are crypto OTC desks generating such robust volume? In this article, we’ll analyse the driver’s of OTC growth, the motivators behind their use, and their future within crypto asset markets.

Institutional Investment and Crypto OTC Desks

For many, institutional investment in crypto asset markets represents the gateway to mainstream adoption. And while the arrival of these parties has been highly speculative, trends suggest the process is already underway. According to a survey by Fidelity Investments, 47% of institutional investors “appreciate that digital assets are an innovative technology play,” while 46% are attracted to their low correlation to other assets. In another study, Morgan Stanley suggests a growing acceptance of crypto assets as an institutional investment class.

Bar chart shows changing attitudes towards crypto as an asset class
Source: Morgan Stanley – Update: Bitcoin, Cryptocurrencies and Blockchain

And as large organisations like Facebook and Goldman Sachs move towards crypto asset issuance, industry momentum is hard to dispute. In step with the hype, wealthy investors, payment processors, and hedge funds continue to play an increasingly important role in crypto asset markets. However, rather than using exchanges, these parties are turning to crypto OTC desks. To decipher why this is happening, the benefits associated with these institutional-friendly platforms provide ample insight.

The Benefits of Crypto OTC Trading

For those looking to trade large volumes of crypto assets, there are several inherent benefits associated with using an OTC desk.

Slippage

Suppose a large investor is looking to purchase 100 BTC, currently worth approximately USD 1.3 million. If the investor attempts to conduct this trade on an exchange, a single seller may not be able to fill the market order. As such, the investor could end up paying the market price for their first bid order, but each subsequent purchase will likely cost them more as they buy up all the higher “ask” orders.

In contrast, when using an OTC desk, investors can purchase the exact amount of BTC they want at a fixed price. This structure ensures there is no risk of slippage when executing a trade – an important consideration when conducting high-volume transactions.

Anonymity

One of the most significant differences between crypto asset exchanges and OTC desks is where trades take place. While OTC trading activity occurs off the market, between two parties, exchanges are public infrastructure. As such, investors looking to maintain their privacy while executing large transactions often prefer OTC desks. Anonymity is especially crucial for independent investors. Personal safety is critical, as is the security of their crypto holdings.

Market Impact

As mentioned, OTC trading happens off the market. This arrangement is appealing to many institutional investors because they want to avoid causing market volatility. When dealing with high-volume trades, these investors benefit by ensuring the value of the asset they’re trading remains stable.

Transaction Fees

Crypto asset exchanges typically charge standard fees to fund, transact, and withdraw from your trading account. In many instances, these fees can average anywhere from 0.1% to 0.2% of the total trade value. Although these fees are nominal, many exchanges use trading amount limits. These limits dictate that you can only exchange a set amount of crypto before larger trades are broken up and charged individually. Unsurprisingly, this can dramatically increase trading costs for high-volume traders.

Alternatively, OTC desks often set fixed rates ranging from 0.35% and 0.4% of total trade volume, without the trade limits. This fee schedule can translate to substantial savings for institutional investors.

The Future of Crypto OTC Trading

Amid a maturing ecosystem, OTC desks will continue to play a vital role in the establishment of this emerging asset class. As a result of increasing acceptance amongst institutional investors and large organisations, crypto assets have become more accessible than ever before. With exchanges such as Binance, Bittrex, and Coinbase launching their own OTC platforms over the past year, it’s evident that many recognise the immense potential of the industry. Despite the notoriously opaque nature of OTC trading, there’s no denying that institutional investment has already begun.