What are the differences between crypto OTC and traditional crypto exchange? It is true that the crypto market is still in its early days and is developing but, even with its emerging status, it has already taken the world by storm and more and more people are showing their interests in different crypto assets.
The trading volumes of its different assets are yet to be comparable with the traditional exchanges but the new technology has raised the bar of trading and investments, though adoption and a proper understanding is elementary to trade successfully in this exciting space.
The features and functionalities of both have made trading easy and now you will find a wide and diverse range of crypto enthusiasts which includes and is not limited to:
- Retail investors
- Companies and family offices
- Accredited investors and
- Venture capital firms.
They all are now interested in adding digital currencies to their investment portfolios for several good reasons, of which future growth prospects and better opportunities for diversification are most significant.
This is where this article comes in.
Crypto OTC vs Traditional Crypto Exchange – The Differences
It is often quite difficult even for the savviest of investors to manage a large crypto portfolio of different types of crypto coins, along with a complicated set of considerations to make while trading including market spread and fees.
If you too want to try your luck in this space, you should first choose a reliable platform to trade which can be an OTC or a traditional crypto exchange.
In order to do so, you should start by knowing the differences between the two and this article will help you a lot in that aspect.
Here are the major aspects that you should consider while exploring both these common and widely used cryptocurrency gateways.
The traditional crypto exchanges mainly function by providing transparency, facilitating liquidity, and maintaining the market price.
On the other hand, the OTC desks only connect the parties involved in crypto trading. These trading platforms however offer some extensive level of flexibility while trading to both the crypto traders and investors alike.
One of the most significant aspects of these Over The Counter desks is that they provide the users with a chance to get hold of even those digital assets that are new and are not yet listed or available on the traditional crypto exchanges to trade.
This gives the holders an early advantage since they get to enjoy the benefits of value appreciation through better and improved adoption after their listing and launch.
However, this is not possible in the case of the traditional crypto exchanges that allow trading with only those assets that are listed on it currently.
There are several strict requirements that the coins need to match in order to get listed on a crypto exchange. This makes these exchanges a bit less flexible in comparison to the OTC trading platforms.
The conditions laid down by the crypto exchanges for listing crypto coins are very complex and cumbersome in comparison to those of the OTC trading platforms.
Different crypto exchanges may have different requirements for the digital assets to meet in order to get listed such as the distributed volume, number of active holders and more.
There may also be listing fees charged by a few crypto exchanges. Sometimes, specific crypto exchanges may even allow the users to vote on which particular crypto coin is to be listed on that exchange.
The fact that the traditional crypto exchanges typically use a standardized system and well-defined criteria for the products to be traded should meet results in their classification into different groups.
In contrast, it is not possible to classify the OTC platforms into different classes because there is a much greater room for flexibility in them.
This is because the transactions made on these platforms follow a bilateral nature between the parties taking part in it.
Ideally, slippage may occur often when you place an order on a crypto exchange. This is the case in those crypto exchanges particularly which execute a trade when the best price to buy or sell a crypto coin emerges.
In case you place a Market Order then the trade will be executed automatically when there is an increase or decrease in value of the asset, as the case may be. This means that your trade will be made at a price that is more or less as expected initially.
On the other hand, in the case of the OTC platforms, such things rarely happen and therefore your trade is more direct and you can expect to get a return just as you desire.
When there is a large trade happening on a traditional crypto exchange, it can also have an effect on the liquidity of the asset that you are trading with. This is because large trades are more likely to be broken up.
This will in turn change the value of the crypto coin on the exchange. Until the trade is completed, separate orders will be sold at a price that is significantly lower than the price expected.
However, on the OTC platforms on the other hand, all trades happen more or less independently of the market.
This means that there is no chance of the liquidity of the asset you are trading with being affected.
This is primarily because when you trade on an OTC platform you actually agree upon a fixed price and it is the responsibility of the broker henceforth to execute the trade at that specific value.
This prior agreement eliminates the chances of lower liquidity and slippage as well.
Typically, the traditional crypto exchanges charge different types and amounts of fees from the traders to make a transaction.
This fee may vary according to the type of the trade, the type of coins involved and several other factors. You can be charged a trading fee which can be about 0.2% on an average.
Apart from that, there can be other fees and charges included such as wire transfer fee, withdrawal fee, and more, which may hover around 0.1% of the total value of the trade.
And, in the case of larger trades, if there is a limit on the trading amount on an exchange, you will have to pay additional fees since your trade will be broken up and charged separately.
On the other hand, the OTC trading platforms do not have such a complicated fee structure. These platforms usually have a single fee charged at a fixed rate for all types of trades conducted on these platforms.
The rates of fees charged by the OTC platform can range anywhere between 0.35% and 0.4% of the total trade amount.
This type of fixed fee structure also protects the traders from the volatile market swings which is why the OTC platforms are more favored by the crypto traders to make large trades.
Custody of Coins
Technically, when you put your crypto coins on an exchange for trading you lose your control and ownership of them. Until you carry out a trade or remove those coins from the exchange these coins are no longer yours.
This ‘IOU’ arrangement is detrimental as well as problematic especially in specific situations such as hacking, technical glitches, or unexpected closure of the exchange itself.
However, with the OTC platforms, you do not lose ownership of your crypto coins throughout the whole trade.
Here, you are simply transferring the ownership and this can be done instantly. Since there is no exchange intermediary present during the process the sole responsibility is on the investor for making each trade successful.
Though this can be considered as a significant benefit, it is paramount that you choose a reliable and honest broker in the first place for that matter.
ID Verification Processes
Know Your Customer and Anti-Money Laundering regulations apply to both the OTC trading platforms as well as the traditional crypto exchanges but the processes vary.
As for the traditional crypto exchanges, a typical individual needs to make quick submissions of a few documents for the verification process which includes two types of ID such as passport and driver’s license.
Additionally, a few exchanges may also ask for your photo holding your identification and others depending on the particular compliance policies and that may be applicable for a particular user.
On the other hand, the ID verification process of the OTC platforms is more stringent and thorough.
This is a very important part of the OTC desks because large trades of more than $100K in value are very common to happen on these trading platforms which are typically made by businesses, family offices, and fund managers.
Several checks are made and documents are required to complete the verification process and even a telephonic interview may be necessary to make sure that the trading network of the OTC and the trading needs of the businesses fit in perfectly.
When you want to make a trade over a traditional crypto exchange, the workflow starts as soon as you decide to buy or sell your crypto.
You can do this online if it is allowed in your country or you will need to visit your bank branch physically and fill out the telegraphic transfer form.
Depending on the process, it may take anywhere from a couple of hours to a few days to complete the transfer.
If you want to sell your crypto coin for fiat, you will need to initiate a transfer of the coins from the place where you control them.
If it is in your hardware wallet, you will have the private keys which will make it a quicker process though you will have to wait for confirmations from the blockchain network before the crypto coins are credited to the account of the exchange.
There may be some delay for different reasons such as:
- If the crypto coins are stored in some deep cold storage then you will need to visit different physical locations to get the private key.
- If the crypto coins are secured by a multi-signature setup then you will need to wait till the other individuals sign off.
- If the coins are with a custodian then the waiting period can be even more due to the long and mandatory hold period which is intended to protect your crypto assets from theft or any fraud.
However, when the necessary funds reach the crypto exchange eventually, you will have to place Market Orders on your trades which will then be executed finally when the specified price conditions are met.
On the other hand, when you want to trade through an OTC platform, you will first have to ping your OTC broker.
You will then be shown a two-sided quote which may vary according to the size of the trade you want to make.
In this situation, you may not worry about the latency between intention and ability to deal since you have signed a legal agreement with your broker to fulfill your financial obligations.
If you choose multiple brokers, you will get multiple quotes and you can choose the best one among them.
Once you agree on the price, you will be given a period of time to send necessary instructions to the custodians to move the crypto coins or to your bank to move the money.
There may be other sources of funds as well that you may need to inform.
Which is Better – Crypto OTC or Traditional Crypto Exchange?
When it comes to deciding between a traditional crypto exchange and an OTC trading platform, it is quite difficult to say which one of them is better.
This is because they vary in their features, functionalities, benefits and drawbacks.
However, it is more prudent to make a choice between them based on your trading needs and preferences as well as the following facts and information.
You can follow the footsteps of the retail investors who prefer to trade over a traditional crypto exchange.
This is because you will be able to make a profit through either market speculation or regular crypto trading.
Another significant reason to go with the traditional crypto exchanges is that you will find a wider and more diverse range of crypto assets to choose from for trading.
You will also be able to see the prevailing market prices of the coins shown in the list.
Moreover, these are also good places to go if you are looking to make crypto asset swaps directly or trade your digital currencies for fiat.
You can also enjoy the benefit of trading in pairs wherein you can trade one crypto coin type that is worth more in fiat currency for some other type that is lower in value thereby making a profit.
On the other hand, using an OTC platform is good if you want to make large trades to the tune of $100K.
Also, these platforms are good in the sense that they facilitate both conversions of crypto assets to fiat and vice versa.
There are also a few specific OTC desks that support swapping crypto assets provided there is ample liquidity available.
It is for all these specific reasons, the OTC desks are so popular among the institutional investors, sophisticated investors, and the substantial crypto asset holders who are often called the whales.
Since they make large trades, they can do it in a single transaction on these OTC platforms and that too more anonymously and without affecting the crypto market.
There are also several other advantages of using an OTC platform for crypto trading. These are:
- Increased liquidity in comparison to the traditional crypto exchanges
- Providing more opportunities to buy large amounts of crypto coins in a short period of time without any slippage
- Increased price protection since they do not change prices and fees even while moving millions of dollars
- More anonymity since the order depth cannot be seen on these platforms
- Providing fiat support which is a distinctive feature of all OTC platforms as compared to the traditional crypto exchanges.
- No limits imposed on purchases made in one day as the traditional crypto exchanges have
- Less common crypto tokens are also available for purchasing in huge amounts than on crypto exchanges and
- No exchange risk is involved because the parties involved in the transaction exchange their assets directly.
However, you should not overlook the downsides of it as well in order to make a better and more precise comparison between the OTC trading platforms and the traditional crypto exchanges.
The most significant disadvantage of the OTC platforms is that the fees are usually much higher as compared to that of the crypto exchanges because the OTC platforms offer more anonymity and higher privacy.
Also, there is a risk involved in the settlement and a few specific OTC platforms may also have a minimum order amount requirement that you should meet.
With all these features and functionalities, the OTC platforms do have a bright future and they will surely have a high demand in the years to follow.
Moreover, the crypto market on the whole will also consolidate and become more mature and therefore will surely shrink.
Just as the crypto whales, the miners will also prefer using the OTC platforms because they will be able to liquidate their crypto assets in the quickest possible way without drawing any attention.
The OTC space will become more competitive in the near future and will be the main gateway for the institutional investors to enter the crypto world and put in their money without hauling the market along with them.
However, there is no good reason yet to believe that the traditional crypto exchanges will become obsolete very soon.
Now, it is up to you to decide which crypto gateway you should use to step into the crypto world.
The normal crypto exchanges as well as the OTC platforms are both good options to use. However, which one to use will depend on how informed you are about the two, especially about their differences that are mentioned in this article.