Explained: Crypto OTC trading and how it works

There is no set method for OTC trading. The only constant is the lack of a user interface, which is common across regular exchanges. Over-the-counter trades often happen through trust, where a requirement is posted, a quote is given, negotiations undertaken and then finally, upon agreement of all parties, the transaction is completed.

At times, there is just one person who acts as a third party, and when it comes to larger sums, an agency may take over the workload to bring together buyers and sellers. OTC agencies that facilitate trading also have their own reserves to ensure urgent liquidity in terms of fiat and other major cryptocurrencies.

The process of signing up for OTC trading is easy as well as challenging. Easy because there are many OTC agencies available across geographies, challenging because it all depends on trust - you should be able to trust someone with enormous amounts of crypto not to cheat you. Fortunately, many mainstream crypto exchanges offer an OTC desk that will allow you to trade large amounts of crypto without breaking a sweat.

Direct Transactions: When you trade over the counter, you buy crypto directly from the seller or sell directly to the buyer. This eliminates third parties (like exchanges) that drum up the asset's price. This is why you do not get crypto at the rates listed on Google, as exchanges add their expenses to the price.

Negotiation - When was the last time you could negotiate prices through an exchange? It is not allowed. The most you can do is set price alerts and buy or sell options at a price of your liking. With OTC trading, you are buying directly from the seller, so you have the option to negotiate a price dependent on external factors to reach an agreement.

Avoiding Fluctuations: When someone buys 1,000 BTC at an exchange, it is likely to take hours for the transaction to go through. Meanwhile, regular audiences get wind of the trade and start buying BTC too. This will cause a spike in the token price, resulting in the whale getting less BTC than intended. This is a phenomenon known as slippage.

With OTC trades, you negotiate and decide on a price and sell or buy every last one of the tokens at the same price. Because the market is unlikely to be aware of the transactions, it won't affect the token's price.

The disadvantages of OTC trading are few but mighty, starting with trust. Popular exchanges have oversight from authorities that eliminates the chance of rug pulls and cheating, but the OTC trades are entirely unregulated. There is no chance of someone getting back their funds if the OTC agent decides to cheat and run away after you've trusted them with your money or assets.

In all fairness, there are legitimate OTC agencies trusted by whales and have operated for years. It is always sensible to be cautious and conduct diligent research before you lay your trust in an OTC agency.