If I asked the average person to buy some bitcoin, chances are good that they would search “buy bitcoin” on Google. In an instant, they would be bombarded by advertisements for various cryptocurrency exchanges – Coinbase, Bithumb, bitFlyer, and so forth. Additionally, they might stumble across some questionable looking bitcoin ATMs.
However, one would have to dig deeper to find a third way of buying cryptocurrency: OTC trading.
“OTC” stands for “over-the-counter.” The term is perhaps more familiar in a pharmacy context. For example, Tylenol is an over-the-counter (non-prescription) drug.
It’s a little bit different in the financial world. Here, OTC trading refers to buying and selling that occurs outside of commodities or stock exchanges (e.g., the New York Stock Exchange).
Exchange-Based vs OTC Cryptocurrency Trading
Say, for example, that Alice wanted to buy 200 Ether at $400 per unit. That’s an $80,000 order.
Alice could try to make her purchase through an exchange, but some platforms may not have sufficient liquidity to support her order. In other words, there might not be enough people selling Ether for $400 (or less) for Alice to complete her purchase.
If Alice places a market order (an order to buy or sell immediately at the current price) on a cryptocurrency exchange, she might also encounter slippage. This happens when the executed trade price deviates from the expected price. Malicious traders might even design strategies to take advantage of price discrepancies when a large buyer or seller (like Alice) enters an order.
Instead of visiting a cryptocurrency exchange, Alice may seek the assistance of a cryptocurrency trading firm. These companies connect large cryptocurrency buyers and sellers, deducting a commission for the service.
For example, to process Alice’s trade, Firm ABC might connect her with Bob, a bitcoin whale.
Another advantage offered by OTC cryptocurrency trading is that it ostensibly avoids potential hacks. When an institution holds a large amount of cryptocurrency, it becomes an obvious target. One OTC trader said that high-profile exchange hacks help increase business for cryptocurrency trading firms, according to Reuters.