In the crypto OTC market, professional market participants can execute large trades privately and with minimal price slippage, which is why institutional investors are flocking towards crypto OTC trading desks.
Read on to learn more about the role of digital dollar stablecoins in the crypto OTC trading market.
Crypto OTC Trading: Where Billions Exchange Hands
While there are no official figures due to the private nature of the over-the-counter market, anecdotal evidence suggests that the crypto OTC market sees 2x to 3x the amount of trading volumes that crypto exchanges process on a daily basis.
The crypto asset market now boasts a total market capitalization of over $1 trillion, but large bitcoin trades can still move the needle quite significantly if executed on-exchange, where the entire market can view the order books.
Institutional investors, therefore, prefer the discretion, professionalism, and best-price execution provided by OTC trading desks. Additionally, there are no exchange limits affecting order size when trading with professional counterparties over-the-counter.
A few years ago, there were only a handful of OTC brokers offering digital asset trading services. Circle was one of them.
Today, the picture looks very different. Now, there are dozens of brokers competing over the institutional money flowing into crypto while most established crypto exchanges have also set up OTC trading desks to meet market demand.
According to a research report by Capco, North America and Asia have the most vibrant crypto OTC markets. Market participants include hedge funds, prop trading houses, family offices, crypto miners, broker-dealers, investment funds, private banks, and high-net-worth individuals.
In the early days of crypto OTC trading, counterparties settled trades with wire transfers. Today, digital dollar stablecoins have largely taken up the role of settlement rail as more and more professional investors are becoming comfortable with using digital currency.
The Role of USDC in the Crypto OTC Market
Digital dollar stablecoins, such as USD Coin (USDC), have three main functions in the crypto OTC market.
USDC acts as:
- Trading capital
- A base currency for pricing
- As a counterparty settlement instrument
First and foremost, professional market participants use USDC as trading capital to improve their trading operation. Unlike US dollar wire transfers, USDC transactions settle within minutes and can cost as little as a few cents. Moreover, on-chain transactions can be followed in real-time, so both counterparties know exactly when funds have settled.
Storing funds overnight in USDC, therefore, makes more sense for active traders who want to move quickly in and out of risky digital assets instead of initiating bank transfers at the start and end of each trading day.
Crypto OTC trading desks also use USDC as a quotation currency to price trades. Since transactions on OTC desks are typically settled in stablecoins, they are also utilized as pricing currencies. So, instead of quoting the price of bitcoin as BTC/USD, OTC desks will typically quote BTC/USDC to their customers.
Additionally, USDC is deployed as a settlement instrument. On-chain USDC transactions can be viewed in real-time on its supporting public blockchains, while settlement typically occurs within minutes and at a fraction of the cost of an international wire transfer. Global counterparties can easily settle with each other in minutes or in seconds across countries. On Algorand, for example, transactions are near-instant and currently only cost approximately 1/20th of a cent.
Crypto traders, therefore, prefer to settle their trades using digital dollars as opposed to traditional US dollar payment rails.
Why Are Professional Traders Choosing USDC?
USDC is the fastest-growing fully reserve digital dollar stablecoin with a market capitalization of over $5 billion, making it one of the most liquid and secure stablecoins in the market.
The market-leading stablecoin is regulated, highly-transparent, price-stable, and can be sent anywhere in the world at the speed of the internet.
Why Use a Crypto OTC Desk?
Institutional investors execute bulk orders through OTC desks. Crypto OTC desks are used when a trade for the desired digital asset is not possible on standard crypto exchanges, and securities are traded via a dealer network. Some securities don’t trade on exchanges at all. An OTC desk, instead of matching the buyers with the sellers, acts as a dealer for users looking to trade a certain asset.
What is an OTC Principal Desk?
An OTC Principal Desk uses their funds to make profits by buying the ordered assets for a price slightly under the market price. The customer gets instructions on how and where to make payments for the assets only after the desk purchases all the assets that were ordered.
What is an OTC Agency Desk?
Agency desks, unlike OTC Principal Desks, do not put their own funds on the line. Agency desks can, thus, charge a fee for providing the service of being a middleman to negotiate a deal on behalf of the customer.
Advantages of crypto OTC trading
- Access to greater liquidity and confidentiality: As crypto exchanges can suffer from low liquidity, trading through OTC desk may be the preferred option for access to high liquidity. An OTC trading desk provides investors with confidentiality as trading is conducted directly between two entities using private infrastructure instead of public networks or order books.
- Lower counterparty risk: There is direct trading between parties. OTC desks will typically help verify the identity of a trading counterparty, act as one itself by directly providing traded assets, reducing the risk of fraud.
Disadvantages of crypto OTC trading
- Volatility: Because the number of available assets might change rapidly as a desk services multiple customers, the price for those assets may also change quickly. Since OTC desks don’t have a public order book, it can be more difficult to predict these price swings.
Why do institutions use crypto OTC rather than crypto exchanges?
Retail investors typically use crypto exchanges or DeFi protocols for trading, as the liquidity available is typically enough to meet their needs. However, large institutions like hedge funds, family offices, and other institutional money managers dealing with very large trades use OTC desks to transact with less price slippage, and take advantage of greater confidentiality offered by OTC transactions.
The Circle Account is the easiest way for institutional investors and other businesses to get real-time access to USDC across all supported networks. Get started with a free Circle Account today.