Beginner's guide to trading cryptocurrency over the counter

Ravi Doshi

By Ravi Doshi

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In the past 12 months alone, the entire cryptocurrency market capitalization has grown from $23 billion to a staggering $400 billion. Such exponential growth has sparked interest from retail investors to institutions. Following suit, 24-hour daily trading volume has gone from $500 million a year ago to approximately $15 billion dollars.

The primary beneficiaries have been electronic exchanges like Coinbase and Gemini, where people can create accounts to buy and sell cryptocurrency. North American exchanges are clunky and difficult to use, but mostly trustworthy. But their pricing on large orders is terrible!

Selling large amounts of coins on these exchanges results in "price slippage," meaning that as the sale is executed, the market responds in-real time to the anticipated impact of the sale. Selling 10,000 bitcoins? Watch the price drop as your sale ticks away. Buying that many? Watch the price increase at similar speed.

Trading "over the counter" involves skipping the electronic exchange and calling up a trader by phone (or these days, a secure channel like Signal). The customer and the trader agree on one price for the whole lot, and the sale is executed, saving both parties time and price slippage.

Typical clients of an OTC desk are hedge funds, investment managers, family offices, and high net worth individuals looking to transact in order sizes upwards of $100,000 USD. Here's how it works.

The OTC Trading Process

  1. When a client decides they want to buy or sell a large amount of cryptocurrency, they begin by approaching an OTC desk and completing "onboarding" documentation. This entails filling out a KYC/AML questionnaire and providing basic verifying documentation. (Our signup form is on our homepage.)

  2. Once onboarded, a client can open up a chat or voice call with a trade anytime between 8am and 8pm EST. There's no script; simply let the trader know what you're looking for.

“I would like to buy $100,000 USD worth of Bitcoin.”

  1. The trader responds with an offer.

“I can sell you BTC at a price of $8,500 USD per bitcoin. Does that work?”

The client can choose whether or not he/she wishes to buy at that price. If the parties agree, the trade is confirmed, and the trader will ask the client for a deposit address where they can send the purchased bitcoins. If the quoted price isn't appetizing, the client can go elsewhere, or wait for the market to change and ask the trader for a new quote later on.

  1. For our purposes, let's say the client decides to make the purchase. After verbally confirming the trade, the client awaits a confirmation of the transaction via email. In this email, the client finds wire instructions for the OTC bank account, where they will wire their USD.

  2. Once the OTC desk receives the wire, the trader sends bitcoin to the wallet address provided by a client, and the trade is complete.

Trading Terminology for Newcomers

-"What is your bid?" Tell me the price at which you're willing to buy.
-"What is your offer? Tell me the price at which you're willing to sell.
-"Give me a two-way market." Tell me both your bid and offer for this coin.
-Request for Quote (“RFQ”): A request for a two-way market.
-Lot size: The quantity in which you wish to trade. (Eg., 50 bitcoins)
-Settlement: The process by which both parties exchange assets once prices are agreed upon.
-Trade Confirm: A receipt showing the full details of an agreed upon trade after it has been executed.
-Trade Log: Spreadsheet showing a history of completed trades.

Summary

Trading over the counter requires you to talk to a real human being, and typically must happen during business hours--but it can result in far better pricing on large cryptocurrency trades, and a lesser chance of error. For large trades, it's the only way to go!