Crypto Exchange Trading VS OTC Trading

In the crypto trading landscape, two primary methods are available for buying, selling, and trading: Exchange Trading and Over-the-Counter (OTC) Trading. Each option comes with its unique features, benefits, and limitations, making them better suited to different types of traders and investors. In this article, we will delve into the distinctions between these two trading approaches to help you decide which one is right for you.

What is Exchange Trading?

Exchange trading involves buying and selling cryptocurrencies on a centralised exchange platform, like Coinstash. Crypto exchanges list various cryptocurrencies which users can easily trade. Users can navigate through a diverse selection of coins, access real-time market data, and execute transactions smoothly on most exchange platforms. 

Exchanges are commonly preferred by everyday retail traders aiming to profit through regular trading or market speculation. Prices on exchanges are determined by supply and demand dynamics. When two parties agree on a price, the transaction is executed, and the agreed-upon price is communicated throughout the market.

What are the Benefits of Exchange Trading?

Variety: Exchanges offer a wide range of cryptocurrencies and trading pairs, allowing traders to diversify their portfolios and explore various investment opportunities.

Price Transparency: Exchange platforms display real-time cryptocurrency market data, and historical price charts, providing traders with valuable information to make informed decisions.

Accessibility: Exchange trading is accessible to traders of all experience levels, with user-friendly interfaces and various order types to accommodate different strategies.

Liquidity: Exchange trading platforms usually have high trading volumes and a broad user base, ensuring ample liquidity.

What is Over-The-Counter (OTC) trading?

Crypto over-the-counter (OTC) trading involves the direct trading of cryptocurrencies between two parties, without using the public order books of traditional exchanges. In most cases, these parties use an intermediary or broker like Coinstash OTC Desk, who acts as a matchmaker facilitating trades between buyers and sellers. These transactions typically involve direct crypto-to-crypto trades, like Bitcoin (BTC) for Ethereum (ETH), or crypto-to-fiat trades, like Tether (USDT) for Australian Dollars (AUD). 

The OTC trading process generally includes negotiations regarding the trade's terms, including the price and quantity of the crypto assets involved. Once both parties reach an agreement, the trade is executed, and the settlement is completed. OTC trading is often the preferred method for traders seeking to conduct large-volume transactions, and it holds particular appeal among sophisticated investors, high-net-worth individuals, institutional investors, and self-managed super funds (SMSFs) because of the liquidity and privacy benefits it offers.

What are the Benefits of OTC Trading?

Improved Liquidity: OTC desks can connect to global liquidity networks, offering better access to deeper liquidity and tighter spreads. This allows buyers and sellers to trade at the best prices without concerns about price slippage, which can happen on regular cryptocurrency exchanges when large trades affect prices due to lower liquidity.

Privacy: OTC trading provides a more confidential approach for large volume trades as transactions are arranged directly between parties, without being visible on public order books.

Flexibility: OTC trading enables buyers and sellers to discuss and negotiate on prices, offering advantages to larger players seeking favourable rates for significant trade sizes.

Personalised Service: OTC desks typically provide personalised services, guiding traders through the OTC process, starting from account setup to trade execution.

How OTC Crypto Trading Works

While crypto OTC trading can seem complicated, it's pretty straightforward. Here's a simplified step-by-step overview of how it works:

1. Finding a counterparty: The initial stage of OTC trading involves finding a suitable counterparty interested in the trade. This can be accomplished through personal networks or OTC desks. OTC trading desks are often preferred as they are experts at connecting buyers and sellers.  

2. Agreeing on terms: Before proceeding with a trade, the OTC desk facilitates negotiations between buyers and sellers, helping them agree on the terms of the trade, including price and quantity.

3. Transaction execution: Once the terms are agreed upon, the OTC desk will proceed with the trade, exchanging the respective digital assets as per the agreement.

What fees are associated with OTC (Over The Counter) Trading?

Trading Fees:

OTC desks charge fees for facilitating transactions. These fees vary but typically range from 0.1% to 1% of the transaction value.

Some desks charge a flat fee, while others use a tiered fee structure based on the transaction size.

Spread:

The spread is the difference between the buying price and the selling price offered by the OTC desk.

Wider spreads can lead to higher costs for traders, as the desk profits from the difference.

Transfer Fees:

Fees for transferring assets from wallets or exchanges to the OTC desk and vice versa.

These can include blockchain network fees for cryptocurrencies, which fluctuate based on network congestion.

Custody Fees:

Some OTC desks offer custodial services for securely storing large amounts of cryptocurrency.

Custody fees vary based on the amount stored and duration.

Settlement Fees:

Fees for the settlement process, ensuring that both parties fulfill their obligations.

May include charges for using escrow services.

Legal and Compliance Fees:

Costs associated with ensuring compliance with regulatory requirements, including KYC (Know Your Customer) and AML (Anti-Money Laundering) procedures.

These fees cover the administrative and legal work involved.

Consultation Fees:

Some OTC desks offer advisory services to help clients with large transactions.

Fees for consultation services can be charged hourly or as a percentage of the transaction value.

On Coinstash, the only fee associated with OTC trading is the spread. This means the difference between the buying price and the selling price offered by Coinstash. This simplified fee structure ensures transparency and helps traders easily understand the cost of their transactions without worrying about additional hidden fees.

What are the requirements for OTC (Over The Counter) Trading?

To participate in OTC (Over The Counter) trading with Coinstash you need a minimum transaction amount of $20K and as per Australian law must be verified with KYC (Know Your Customer) and AML (Anti-Money Laundering) requirements.

Considerations when choosing between a Crypto Exchange & OTC Desk

When deciding between exchange trading or OTC trading, several key factors come into play. 

Slippage and Liquidity

When deciding on your trading approach, it's crucial to consider the impact of slippage and liquidity. Traditional exchanges can pose challenges in terms of liquidity, particularly when executing large market orders that match the current market price. This can result in unexpected trade outcomes due to market fluctuations.

Unlike an exchange, OTC desk transactions operate independently of the broader market and its liquidity constraints. Before the trade, a fixed price is agreed upon, and the OTC desk ensures the trade is executed at that pre-determined price. This means that liquidity and slippage are not concerns when trading on an OTC desk.

Trade Size

When determining the most suitable trading method, it's essential to factor in the size of your trades. Exchange trading is typically the best fit for retail and small-scale traders, offering advantages such as accessibility and ease of use. However, for users looking to trade large amounts of crypto, OTC trading is often the best solution due to the enhanced liquidity, pricing and privacy available. The discretionary nature of OTC trading permits the negotiation of customised terms and pricing, a level of flexibility that exchanges often cannot provide since they rely on matching orders based on current market conditions.

Service Experience

The service experience differs significantly between exchange and OTC trading. In exchange trading, transactions are typically more automated, relying on order matching based on market conditions. This automation may limit the level of customisation and personalisation available. On the other hand, OTC trading offers a highly personalised experience where participants enjoy more control and flexibility when shaping the terms of their trades. The direct interaction and negotiation between parties allow for tailored solutions to meet specific requirements. 

Risks

Both exchange trading and OTC trading carry their respective risks that traders should be aware of. With exchange trading, one notable risk is the potential for slippage, where market orders execute at prices that may deviate from the intended entry or exit points due to market fluctuations. This can be compounded by lower liquidity, especially when dealing with large transactions. This underscores the importance of choosing a reputable and well-established exchange platform, such as Coinstash. Using a trusted exchange can help mitigate the risks associated with slippage and provide a more secure and reliable trading environment for traders.

On the other hand, OTC trading introduces the risk of counterparty default, where one party fails to fulfil its obligations within the agreed-upon terms of the trade. However, this risk can be effectively managed by working with established and trusted OTC desks like Coinstash OTC. These intermediaries play a crucial role in verifying the credibility of counterparties and ensuring the secure completion of transactions.

Frequently Asked Questions