What is an OTC exchange?

The primary way by which investors get started with cryptocurrency is through the purchase of assets on an exchange. Indeed, some of the top crypto exchanges, like Binance, Huobi, Coinbase, and Kraken, carry out billions of dollars of trades every day. Sometimes, though, the big trading platforms just can't offer the services that certain investors need.

Unlike retail users of crypto, high-net-worth and corporate investors are faced with certain major obstacles when carrying out token purchases and sales. They must meet more stringent compliance requirements and remain accountable to a greater number of stakeholders. Their service needs, simply put, are different.

Ultimately, these investors and their money managers run into two key problems when using major cryptocurrency exchanges: illiquidity and inadequate privacy. OTC exchanges (also called crypto brokerages) are the solution.

In today's blog post, we will discuss why.
Liquidity and slippage
When an investor submits an order on a crypto exchange, there is no guarantee that it will be fulfilled: as the size of the order increases, the chances of success decreases and the probability of price slippage goes higher and higher. In truth, neither market nor limit orders are a great bet for investors that are taking large positions.

Let's say an investor has a large sum of fiat currency that they would like to use to purchase Bitcoin. If they were to decide to submit a market order - agreeing to pay the current market price - they may find that they end up with far less cryptocurrency than they were expecting to receive. This is because the cryptocurrency exchange is not likely to have on their order books any sellers with that large an amount of Bitcoin up for sale. The exchange would need to split the order into smaller 'sub-orders,' and fulfill them one after the other. It is quite possible that the rate paid for later sub-orders would be higher than that of the earlier ones.

Limit orders, on the other hand, may be even more problematic. In this kind of order, the user of the exchange specifies at which rate they wish to purchase the cryptocurrency in question. The issue, here, is that the asset may never return to that rate, or it may take a very long time to do so. Then, it is not likely that a single seller will be listed on the order books that can fulfill the entire order. Large limit orders have a very low chance of success.

One thing that is very much misunderstood in the press today about cryptocurrencies is that their transactions are entirely trackable using tools called blockchain explorers. The wallet addresses of large crypto holders, who are frequently referred to as 'whales,' are well-known in the community and can easily be tracked using software, or by manually looking them up on sites like https://blockchain.com.

This is not an appropriate scenario for certain kinds of investors, including high-net-worth individuals and companies. Even when full transparency is not an issue, significant and sudden movement by large crypto addresses can have unexpected consequences in terms of market price.
What is an OTC Exchange?
An over-the-counter (OTC) exchange is a business that acts as the investor's agent during the purchase and sale of cryptocurrency. Also referred to as 'crypto brokerages,' these blockchain financial institutions do not maintain order books in the same way as do regular trading platforms. They instead find liquidity through other means.

Following the submission of a client order, OTC exchanges make use of all the tools at their disposal to fulfill it. The exchange may be able to find a single counterparty for the trade, in which case the order may be fulfilled fully "over the counter." Or, the exchange may be able to negotiate transactions with multiple parties, including other exchanges and businesses, in such a way so as to offer better conditions to the client.

These kinds of trades are far more discreet than other kinds of trades. By acting as the client's representative during large trades, OTC exchanges shield investors and sellers from the public eye. If a single large transaction must be completed on a major blockchain, only the exchange's wallet address will be trackable. If the large trade was a cryptocurrency purchase, privacy-conscious investors can ask that the coins be sent to multiple wallets over a longer course of time. If it was a sale that occurred, transactions to the exchange can be split up as well.

Bespoke crypto trading
Compared to other types of crypto exchanges, OTC desks offer far more flexible service in terms of payment and withdrawal options, personalised client support, and customised product offerings. Most crypto brokers have experience dealing with a range of unique client needs that vary according to jurisdiction, industry, and other factors.

Advantages of OTC Exchanges:

  1. Guaranteed execution of larger trades

  2. Easier and faster liquidity

  3. Professional discretion and privacy

  4. Dedicated support and personalised service

To our clients, we always recommend our OTC exchange partner ALTERXE. An EU-licensed cryptocurrency broker based in Estonia, the ALTERXE team works around the clock, always negotiating the very best deals for high-net-worth and corporate clients. With a wide range of liquidity tools at their disposal and with a dedicated client support department, they are the crypto-financial partner you have been looking for.

  • Rapid-fire onboarding: get your corporate account set up in hours (the other guys take 4-6 weeks!).

  • Concierge service: highly-experienced team of crypto-finance and private banking specialists.

  • Sleek UI/UX: start trading in just a few clicks and manage your funds with ease.
Explore your options with us
At AlterCap, we specialise in helping corporate clients to start building cryptoasset portfolios. Contact us today to learn more about crypto compliance, custody, taxation, and portfolio diversification.