OTC bitcoin brokers aim to provide liquidity to the bitcoin whales that top the “bitcoin rich list” and trade in ticket sizes north of $100,000 in BTC. While the number of bitcoin holders who hold millions in BTC and regularly place trades of this size is very limited, brokers are targeting a new type of bitcoin client: the institutional investor.
Institutional investors gradually started entering the crypto asset market last year, thanks to the exuberate gains that leading digital assets managed to book in 2017. Digital currency-focused hedge funds, foreign exchange funds, and even a handful of mutual funds have started to eye bitcoin and other crypto assets for their portfolios.
While there has been a surge in individuals on social media claiming to provide OTC cryptocurrency trading services, only a handful of brokerages have managed to establish themselves are trusted counterparties in the OTC market. These are the brokerages you will be introduced to in this article.
London-based bitcoin brokerage and advisory firm BitStocks was launched in 2014 to provide UK-based high net worth individuals and institutional investors with bitcoin liquidity.
BitStocks does not charge a flat commission for its execution-only service. Instead, it incorporates its cut in the bid/offer price. However, unlike other “pure” brokerage services, BitStocks also provides its clients with a market advisory service, for which it charges a 25 percent performance fee on profitable trades.
BitStocks is currently not regulated as bitcoin is considered “private money” in the UK and, thus, does not require a securities trading license for its service.
Circle Trade is the OTC brokerage arm of Goldman Sachs-backed digital currency startup Circle. Circle Trade provides OTC digital asset trading services for high-net worth individuals and institutional investors, and reportedly trades $2 billion worth of cryptocurrency a month.
Business Insider reported Circle Trade recently bumped up its minimum ticket size from $250,000 to $500,000 but average trades sizes are $1 million dollars, according to Circle CEO Jeremy Allaire, with some trades even exceeding $100 million.
The DRW Holdings subsidiary, Cumberland Mining, has also managed to establish itself as a market leader in the bitcoin OTC brokerage market since it opened its doors in 2014.
The Chicago-based brokerage firm, which has recently opened offices in Asia and Europe, provides liquidity for high net-worth individuals and institutional investors in major digital assets as well as enabling large investors to participate in initial coin offerings.
Minimum trade size is $100,000 and trading fees are incorporated in the bid/offer spread.
New York-based Genesis Global Trading is probably the most established bitcoin broker. The company was spun out of SecondMarket’s former trading division and is owned by the leading blockchain investment firm Digital Currency Group.
Genesis Trading started its brokerage service back in 2013 and due to its ownership by Digital Currency Group is one of the most reputable players in the OTC bitcoin market.
Minimum ticket size is $25,000 and there is no fixed percentage. Instead, Genesis Trading incorporates its fee in a fixed spread above the XBX Bitcoin Index.
IBC Group provides an OTC dark pool (ODP) brokerage service that enables high net-worth individuals and institutions to access bitcoin liquidity outside of the exchange ecosystem.
According to its website, “IBC helps investors move money from traditional fiat currency into cryptocurrency via secure, private transactions facilitated through flexible distribution channels including personal Trezor wallet delivery.”
New York-based digital asset exchange itBit, which launched in 2013, also has a bitcoin OTC trading desk servicing large investors.
Minimum trade size is 25 BTC and a 0.1 percent fee is charged on each transaction. According to the company website, itBit’s brokerage arm services clients in over 100 countries and is fully regulated bitcoin exchange in the State of New York.
Chicago-based Jump Trading is a new addition to the OTC bitcoin market and provides a new solution to investors who prefer to keep their trades off exchanges.
The brokerage startup has developed a desktop GUI that allows investors to interact with Jump Trading’s OTC Desk through a secured connection. This alleviates the challenges that stem from dealing on messaging platforms such as Skype.
An OTC alternative to exchanges
The attraction of OTC markets besides the large volumes one can move around with less scrutiny than on-exchange is the customization of contracts. Even companies whose shares aren’t listed on exchanges or have bad credit ratings can arrange to sell a stake OTC - however writing the contracts is a technical task that requires the labour of several legal scribes and many hours of preparation.
Augur, whose REP token was one of the first on ERC20 to ICO back in 2015, is a price forecasting platform where traders (or anyone putting a wager on real-world events) make their own contracts over-the-counter and cut down on the legal intermediaries through the use of smart contracts. The bets can vary from sports and political outcomes to arranging a large financial transaction.
Co-founder of Augur, Jeremy Gardner, recently revealed that investors in OTC markets are seeking multi-billion dollar bids to invest in the crypto markets. Currently, those wishing to trade bitcoin OTC typically go to the miners or crypto whales who own large chunks of the currencies Gardner said, “OTC market demand for bitcoin right now is unlike anything I’ve ever witnessed. Several ask for multi-billion dollar bids.”
Augur is backed by San-Francisco-based blockchain venture fund Pantera Capital and is due to launch its mainnet this month. Pantera’s portfolio includes BitPesa, Bitstamp, Circle and Xapo among other high profile projects.
Does OTC trading affect the spot price on exchanges?
With these millions and potentially billions worth of trades sloshing around in the background of the exchanges how might these large volumes affect the spot price on exchanges?
Ari Paul, CIO and managing partner of BlockTower Capital, says because the the impact should be null, as often in OTC trades “one party is either totally or completely hedging on exchange, often over some period of time (eg someone buys $100m BTC OTC and a market maker then buys back that BTC over 48hrs”, or if buyers and sellers of $100m BTC meet over-the-counter instead of on exchange, the net impact on prices are likely to be similar - nothing.
Of course there is still potential incentive for a party to manipulate prices between OTC and exchanges, and this sort of “spoof trading” is part of what the CFTC is currently investigating in the futures market.
With a big sell order on an exchange a player can push up the OTC bid price and sell for a higher price there. “If someone can move an exchange price lower with $20m sell and then execute a $200m OTC buy at the new price they may profit from manipulation,” Paul says.
Why institutional investors are looking to OTC brokers
Institutional investors have strict compliance guidelines that they are required to follow for regulatory reasons. Hence, trading digital assets on relatively insecure (and often overseas) digital asset exchanges is a risk that not everyone is willing to take. Instead, institutional investors look towards established OTC brokerage firms to execute their trades.
Brokers act as the intermediary and thus ensure that all trading counterparties are fully KYC’d before a trade is executed. This drastically reduces the chance of fraudulent trades or falling victim to a scam.
Furthermore, investors are not required to store their funds on third-party accounts to conduct their trades. This effectively negates the potential for a loss of funds because of a hack. In fact, an OTC broker who decided to remain anonymous told Reuters: “When the big [exchange] hacks happen we tend to see business go up.”
Finally, OTC trading allows large investors to receive better pricing than they would on exchanges as a large seller or a larger buy would quickly cause the price of bitcoin to move when they are detected in the order books.
The bitcoin OTC market is well positioned to continue its upward trend as more institutional investors, who are looking for the same service they are used to in the traditional financial markets, are entering the crypto market.