OTC Crypto Trading Is Alive and Substantial… But You Didn’t Hear That From Us
OTC (over-the-counter) trading in cryptocurrencies is happening more than crypto markets realize. While difficult to quantify, Coinbase’s decision to launch an OTC trading desk earlier this month appears to confirm institutional interest in crypto in the background of a chilling bear market.
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Coinbase Joins Poloniex in Offering OTC Trading
Coinbase added an over-the-counter trading facility for its Prime customers this month. Per head of sales Christine Sandler:
“We launched our OTC business as a complement to our exchange business because we found a lot of institutions were using OTC as an on-ramp for crypto trading. We felt this was a huge benefit to our clients to actually leverage both our exchange and our OTC business.”
Business Insider reported on May 1st that the San Francisco-based exchange had the intention to cater to institutional investors. On May 15th, Bitsonline reported that the giant had splintered its business into various products. Coinbase Prime is geared toward institutional investors, with Pro for sophisticated individual traders, and the simpler Coinbase platform for retail-level onramping.
The speculation that it would create an OTC desk under its Prime product has proven right. Coinbase joins Poloniex in the OTC game, which offers a similar product known as Circle Trade. The minimum trade permitted on Circle Trade is $250,000 USD.
The Benefits of OTC Trading
For institutional players such as banks, who typically make large-scale transactions, over-the-counter trading offers a way to trade without affecting the market price. It evades an exchange altogether, allowing a buyer and seller to trade directly.
This ‘nil impact on price’ quality has been questioned, however, by Ari Paul, as reported by Bitsonline in June:
1/ OTC and exchange trading have similar impacts on price. People sometimes ask if OTC volume has any impact on price at all. A good starting assumption is that it's identical to exchange volume, can then differentiate on nuances.
— Ari Paul (@AriDavidPaul) June 10, 2018
The other attraction of OTC trading is allowing large investors to tap a level of liquidity that simply isn’t available on exchanges. TABB Research Group released a report in April suggesting that trading on exchanges paled in comparison to OTC trading, which amounted to between two to three times the volume traded in public:
Just read an estimate from the TABB Group (in a $5000 report) that OTC crypto markets exceed exchange volumes by 2-3x. That would mean 1-1.5MM BTC is traded OTC *daily*. Strange it's not visible on the blockchain, which shows a meager 100k/day.
— Eric Wall (@ercwl) July 29, 2018
TABB senior analyst Monica Summerville reckons that interest will grow even more as regulatory clarity and more robust infrastructure develop. Per a May 2018 statement:
“The word on the street is that a significant amount of additional institutional money is being amassed, sitting on the sidelines, held back by a lack of greater regulatory clarity, institutional grade data and enterprise-ready infrastructure, waiting for the right conditions to enter the market, expected to begin happening this year.”
Genesis Global Trading has reportedly seen a tenfold increase in average daily trades this year compared to last year on its OTC crypto trading desk. The persistent bear market is aiding and abetting that volume, as big money snaffles up digital assets from distressed retail investors.
Why Isn’t This Institutional Money Driving up Prices?
Notwithstanding Ari Paul’s argument above, for those wondering why institutional money is not driving up crypto prices, as many had hoped, the answer is because ‘over-the-counter’ can perhaps be more appropriately thought of as ‘under-the-table’.
Off-exchange trades avoid, by design, having a large impact on market prices. A large purchaser would likely cause (and have to pay for) a price surge on an exchange by placing a sweeping order running into the millions of dollars. OTC trading desks avoid having that impact by occurring outside the market.
The Wall Street interest the average crypto pundit talks about as being the holy grail for crypto prices is already here. But because it is undeclared, discreet interest, it isn’t causing price surges. Exactly as intended.
Have your say. Do you believe institutional interest in crypto is already here? Do you care?
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