Lately, Crypto OTC Trading Is Coming Into Its Own

Lately, Crypto OTC Trading Is Coming Into Its Own

As the cryptoverse’s regulatory situation continues to come into focus in America, so too does over-the-counter (OTC) crypto trading. From new theories about how OTC trading affects the wider cryptoeconomy to new services designed to optimize off-exchange trades, bilateral contracts are trending. 

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Ari Paul: OTC, Exchange Trading Have Similar Impacts

One view that’s gained “conventional” status in the cryptocurrency space is the idea that off-exchange trading, or OTC trading, is a way to prevent the wider crypto-markets from being acutely shocked by massive trades. It’s a sentiment that’s unquestionably gained traction in light of the MtGox trustee’s recent bitcoin sell-offs.

But does OTC crypto trading really affect the cryptoeconomy much differently that exchange-based trading? At least in some cases?

BlockTower Capital co-founder and CIO and respected crypto pundit Ari Paul thinks a drastic difference may not be so for the most part, per a new Twitter thread wherein he expounded on why “OTC and exchange trading have similar impacts on price.”

Crypto
Ari Paul.

Paul started by theorizing that OTC crypto trades are oftentimes inter-linked with exchange trading:

That’s because, in his view, 1) the involved party or parties are likely “hedging on exchange[s],” e.g. a market maker buys back on an exchange what they’ve just sold OTC, or 2) the inverse situation in which a party is buying their crypto liquidity OTC and then selling on an exchange.

Paul thinks these likely dynamics lead to what he calls “null impact.” He did qualify that he wasn’t suggesting that exchange-based trading and OTC trading had uniformly simiilar efffects on the cryptoeconomy, but he said his analysis was a “starting point” to begin thinking about the affects of OTC trading in a new light.

On the Flip Side

In a brief continuation of the same Twitter thread, Paul went on to contrast where he thought exchange and OTC trading really departed. He began with manipulation, i.e. causing price slides on exchanges in order to capitalize in OTC markets.

Paul also said “OTC volume may obfuscate what’s really going on” when it comes to analyzing where the market is going. Lastly, the BlockTower Capital co-founder pointed out how OTC trading might negatively impact liquidity for smaller crypto traders:

All interesting food for thought that highlights how OTC trading is coming into increased focus in the cryptoverse.

Lots of Recent OTC Happenings

With the growing attention around OTC crypto trading has come growing development. OTC trading in the space has hitherto been more or less adolescent, with Reuters reporting that online chat service Skype has become a pivotal tool in the facilitation of such crypto trades. It’s a start, but it’s far from an ideal system. And that’s why we’re starting to a see a lot more movement in the field of OTC.

In May, powerhouse cryptocurrency exchange Coinbase announced its new suite of institutional services, which will provide “lending and margin financing products to qualified clients, high touch and low touch execution services like over-the-counter (OTC) trading and algorithmic orders.” Before that, in April, Coinbase’s top domestic competitor Gemini announced the launch of a block trading system that allowed OTC trades “outside of Gemini’s continuous order books.”

Now, the latest word on the OTC front comes out of Chicago, where Jump Trading — a firm renowned for its hyper-fast trading capabilities — has reportedly created an “OTC platform for electronic bitcoin trading,” per sources that spoke with Business Insider‘s Frank Chaparro.

OTC trading began to seriously pick up steam last year in tandem with the cryptoeconomy’s unprecedented acute surge in 2017, particularly in nations like China. Even with the acute bearish chop that we’ve seen extending into Q2 2018, OTC trading is set to only continue becoming more entrenched and developed in the space. Hopefully so too will our understanding of its effects on the market. It’s an inway for increased institutional investment that will be watched closely from all angles in the months and years ahead.

What’s your take? Do you think OTC trading affects the market differently than exchange trading?


Images via Cantech Letter, Global Risk Insights

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