A Beginners Guide To OTC Markets In Crypto

What’s the first thing that pops into mind when you hear “over-the-counter”?

For many, the phrase will create images of easy access to medication. OTC, however, has been around for quite some time and draws its roots from some of the first store-based exchange of goods. It refers more specifically to the easy access part than anything else.

The crypto markets are evolving, and big and small players alike are looking for the best ways to get involved. We’re going to take a deep dive into OTC as it relates to crypto and find out what opportunities the virtual currency markets are opening up for a new class of investor.

But before we do, we should probably get some pesky definitions out of the way:

Security (n): A security is any financial instrument which has a monetary value and is exchangeable/tradable on a market. Securities in most cases are used as a tool for making a profit but can also be used for technical reasons such as hedging.

Exchange (n): Most securities trade on exchanges. An exchange is a marketplace which trades securities and other complex financial instruments. They bring together brokers, dealers, and investors in a centralized way to standardize the buying and selling of these instruments. Through regulation, they also monitor markets to prevent fraud.

OTC (n): Over-the-counter is a fancy way of saying “decentralized trading”. Orders are not listed on a public order book. Clients can trade with each via broker without anyone else knowing about their transaction.

In the traditional financial world, companies that don’t have the right reputation and/or required funds to pay for exchange fees may go the OTC route to raise capital. In the crypto context, we are now seeing this phenomenon unfold as the ICO boom gathers pace.

Elsewhere, very large crypto holders (whales) would prefer to make large trades without drawing too much attention and therefore seek out specialized brokers to make this happen.

Biggest OTC Markets

It’s fairly difficult to gauge which markets and brokers are the biggest in the cryptosphere because a lot of business in this area is done privately. Vinny Lingham of the Civic project outlined some of his thoughts on the subject in a blog post and via twitter a few years back:

Overlooked fact: The OTC market for Bitcoin is bigger than the exchange market. Exchanges set the price but large trades don’t happen there.

— Vinny Lingham (@VinnyLingham) June 26, 2016