OTC Versus Exchanges: Whales Against Retail Traders
For many years, the majority of bitcoin analysts predicted billions of dollars to be traded on a regular basis in the OTC market, by billionaire investors, institutions, and miners. While cryptocurrency exchanges like Coinbase, Binance, Huobi, OKEx, and UPbit process hundreds of millions of dollars worth of trades every day, the liquidity on these platforms are not sufficient to process multi-billion dollar buy and sell orders.
The lack of liquidity on major exchanges is the first amongst many other issues that could emerge in processing large trades for high profile investors. Selling hundreds of millions of dollars of bitcoin on a public exchange in a short period of time could crash the market, especially if there are not enough buy orders set in place to liquidate large sell orders.
Most cryptocurrency trading is actually occurring off-exchange at over-the-counter (OTC) trading desks.
As such, billionaire traders and institutions have relied on the OTC market to buy and sell batches of bitcoin and other cryptocurrencies like ether, mostly from miners and other major investors.
This week, TABB Group claimed that the OTC market of bitcoin is at least two to three times larger than exchange market. Given that the bitcoin exchange market processes around $4 billion worth of trades per day, if the TABB’s assessment is accurate, the OTC market of bitcoin is processing more than $12 billion worth of trades on a daily basis.
Eric Wall, a cryptocurrency researcher, said:
“Just read an estimate from the TABB Group (in a $5,000 report) that OTC crypto markets exceed exchange volumes by 2-3x. That would mean 1 to 1.5 million BTC is traded OTC daily. Strange it’s not visible on the blockchain, which shows a meager 100,000 a day.”
Monica Summerville, a senior FinTech analyst at Tabb Group, explained further that the research firm was able to obtain the $12 billion number based on interviews and evaluation of the market.
“Our reports are based on interviews and with participants in markets, cover more than BTC and keep in mind that not all transactions show up on public blockchains as many venues omnibus accounts so only net changes to their positions will be written to public blockchain,” she said.
What Does This All Mean?
The movement of the cryptocurrency exchange market is unpredictable and the market often demonstrates an extreme rate of volatility. Even major digital assets like bitcoin and ether tend to move 3 to 10 percent on a daily basis on both the upside and downside.
If the bitcoin exchange market only accounts for 25 percent of the actual volume of the dominant cryptocurrency, it is that much more difficult to find the cause of the movements of BTC and other cryptocurrencies.
For instance, on July 17, many analysts attributed to the fall in the price of bitcoin from $8,300 to $7,800 to the rejection of the Winklevoss bitcoin exchange-traded fund (ETF). However, it is entirely possible, given the sheer size of the OTC market, that the drop was caused by a sell-off of a major investor outside of the bitcoin exchange market.