Whales are moving billions on the OTC market every day — transactions that influence the price of bitcoin without ever appearing on an exchange’s order book — a scenario which could affect the SEC approval of a Bitcoin ETF going forward
Investors trade over $11 billion worth of crypto assets on exchanges on a daily basis. What that figure does not include, however, are over-the-counter trades that are said to dwarf on-exchange trading volumes as large investors prefer to conduct their bitcoin trades away from the prying eyes of exchange order books.
What is the OTC bitcoin market?
The over-the-counter bitcoin market is where investors with deep pockets, such as early adopters, crypto funds, and high-net-worth individuals, buy and sell bitcoin using OTC brokers directly between each other as opposed to on exchanges. Large trades will move the prices in this fairly illiquid market. Hence, large investors prefer to trade away from exchanges.
Investors that fall into this category hold millions in bitcoin (and other cryptocurrencies) and will be members of the so-called “bitcoin rich list,” the list of the BTC wallets with the largest holdings, and hold anything between one to one hundred million dollars worth of cryptocurrency.
Ticket sizes of OTC bitcoin trades will generally start between $75,000 to $250,000 but can go into the hundreds of millions.
According to Reuters, leading bitcoin broker Genesis Trading handles between $75 million to $80 million in trading volume per day. If you multiply that number by the dozens of OTC bitcoin brokers that are currently servicing this market, it is easy to see how OTC volumes could exceed on-exchange volumes.
In a report by consultancy TABB, the author states – based on interviews with industry participants – that cryptocurrency OTC trading can be 2-3x the size of daily trading volumes on exchanges.
Does the OTC market affect the price of bitcoin?
Given that OTC trades happen away from exchanges, they should – in theory – not affect the price of bitcoin at all. However, if there is a large buyer (or seller) making inquiries in the OTC market, the word can (and most likely will) get out, and prices on exchanges will be affected.
For example, if an early bitcoin adopter wants to cash out some of their BTC holdings – let’s say 10,000 BTC (worth around 65 million in today’s market) and asks more than one OTC broker for a suitable bid, bitcoin investors who are active in both the OTC market and on exchanges could end up selling BTC on exchanges in anticipation of the seller’s large trade pushing prices lower.
And they would be right to think so, as many believe the sell off by the Mt Gox receivers of 35,000 BTC between December 2017 and February 2018 was a major contributor to the bitcoin price slide.
The OTC market is, therefore, a great source of information for investors as well as a good reference point for where the price of bitcoin is really trading. Since exchanges primarily service retail traders, you could argue that the “real” price of bitcoin is found in the OTC market where large investors are crossing trades in the hundreds of millions.
How might a thriving OTC market affect a bitcoin ETF approval
An interesting aspect of the OTC market for cryptocurrencies, which has not yet become a major point of discussion, is how the growing bitcoin OTC market could affect the approval of a Bitcoin ETF going forward.
As reported in August, the main reasons for the SEC’s decision not to approve any Bitcoin ETFs so far have been concerns surrounding potential market manipulation, the lack of adequate surveillance-sharing agreements, and the lack of traditional means of detecting and deterring fraud and manipulation.
Despite requiring KYC/AML documentation to partake, the OTC market is effectively entirely unregulated and, thus, is not able to provide any guarantee that no market manipulation can take place. If anything, the OTC market can breed unethical trading behavior due to its relative anonymity and lack of regulation.
For example, an investor could reach out to several brokers inquiring for a bid for a significant amount of BTC without having the intention of actually selling any coins. However, a large sell inquiry, as discussed earlier, could drive down the price of bitcoin at which point the investor could then scoop up BTC for cheaper on exchanges, should prices be affected across the board.
Furthermore, there are no surveillance-sharing agreements in the bitcoin OTC market, and traditional fraud detection measures are hard to implement due to the nature of this market.
Therefore, should bitcoin trading continue to move more towards OTC as opposed to onto regulated exchanges, the growing bitcoin OTC market could become a hindrance to the approval of the much-anticipated Bitcoin ETF.
How to trade bitcoin over-the-counter
As appealing as it might be for someone to trade crypto OTC, it is unfortunately only an option for the well capitalized and is becoming more so — with Circle doubling its minimum order to $500,000 back in April.
If you have the cash ($50,000 should be considered a minimum for entry) you will need to comply with jurisdictional ‘Anti Money Laundering’ and ‘Know your Customer’ regulations — which means submitting paperwork that proves your identity.
These AML/KYC procedures are meant to establish for the brokerage firm that their client’s funds are not from illicit activities. Investors should understand that in most jurisdictions brokerages and a host of other financial institutions are required by law to file ‘suspicious activity reports’ with the relevant authority should they have any concerns about a client’s source of funds.
Once KYC’ed, the investor can reach out to their broker and inquire information about buyers and sellers currently active in the OTC market or tell the broker what trade they want to do.
For example, an investor may tell the broker that they want to sell 100 BTC and are looking for a price around $6,500. The broker will then reach out to his clients who have are currently buyers of BTC and will inform them that there is an offer of 100 BTC at $6,500 in the market.
Once the broker has found a buyer that can take the full size or, for example, two buyers who can take 50 BTC each, there will likely be a bit of back and forth on the price until all parties have agreed to a price and the trade executes.