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OTC Cryptocurrency Markets — An Introduction

Liz Louw
Liz Louw
4 January 2019

Interview with Elia Yousif, Head of OTC Desk and Settlements, Bitstocks

One of the most speculated crypto matters of 2018 was that of high volume capital inflows through OTC (Over-The-Counter) channels. While the crypto bear market has stuck around, these almost contradictory reports of a spike in institutional crypto investors kept popping up over the course of the year.

As the rumour goes, the current low market prices are not nearly reflective of the true demand, due to institutional investors using the back door for their crypto buys. When taking into account the commonly-held definition of OTC services, it is not difficult to see how these assumptions came about.

OTC Definition:

Over-the-Counter (OTC) trading: Trading is done directly between two parties, without the supervision of an exchange. Buying crypto directly, sometimes face-to-face, from a broker does not affect market price as the demand is not reflected.

Considering the potential implications of the matter, I decided to chat to Elia Yousif, head of Bitstocks OTC desk, to get his take on the rumours and gain a basic understanding of the OTC industry.

Liz: Elia, thank you for letting me pick your brain on this topic. What is your response to reports of a spike in institutional capital inflows in 2018? Does your experience corroborate?

Elia: Well, we have seen an upturn in crypto investment by larger firms over the year, but the bulk has been from family offices, private banks, and smaller hedge funds with flexible mandates that make them more agile to invest in crypto. Big investment banks will not be coming into the market at this point due to a lack of institutional infrastructure, mainly regulated custodianship services and investment products.

When you look at how investment works traditionally, you will get an idea of the infrastructure that the crypto industry is still lacking if it wants to entice these groups. Banks, equity houses and the biggest hedge funds do not trade assets directly. Instead, they deal with a prime broker, for instance, Barclays. This broker manages and settles the asset and does everything on behalf of the investor. As regulated custodianship services are only just starting to develop in crypto, it is too early to expect bulk capital inflows from institutional investors.

Liz: What about rumours that the market is currently far underpriced as the bulk of trade has been happening off-exchange, between private dealers and OTC desks? Is this truly reflective of the scenario?

Elia: It seems that there’s a misunderstanding about the nature of traditional OTC services, even in cryptocurrency. The bulk of OTC desks are market makers that provide liquidity by sourcing coins from their network and the open market. Liquidity providers try to operate with zero-risk, and wouldn’t take the chance of keeping a stockpile of coins off-exchange, unhedged against market fluctuations.

Another factor that casts doubt on the rumours of a large volume of whale-sized trades happening off-exchange, is the matter of settlement. In the case of multi-million dollar deals, private settlement is tremendously problematic as transferring huge amounts will automatically get flagged by the banks involved.   

Liz: If OTC desks often source from exchanges, why do HNWI’s (High Net Worth Individuals) and institutions prefer it over trading on exchange themselves?

Elia: There are several reasons. An investor takes great risks by dealing with another private individual. Revealing your access to a large crypto balance to an untrusted party is the first problem. While it is impossible to hack the blockchain and difficult to hack into an online exchange, humans are vulnerable to scams, physical threats and violence. Working through a trusted institution removes the risk of getting robbed, kidnapped or defrauded as KYC and AML is undertaken to verify all parties, and the trading desk acts as the middleman keeping the identities of all parties confidential.

The ease of transaction is also a highly valued aspect for HNWI’s. Even if an investment mandate allows the inclusion of crypto assets, the firm might not have or choose to have an in-house crypto specialist. Not only does OTC simplify the process of buying and selling crypto, but OTC services could also include custodianship.

OTC services provide another huge benefit, which is the prevention of slippage. If a million dollar order should be placed on an exchange, it will naturally affect market prices. With OTC, buyers and sellers are guaranteed the price of their confirmed quotation, even during times of volatility.

Liz: What do you think about stories of crypto brokers walking around with hardware wallets, doing private deals?

Elia: Nobody who understands how a hardware wallets works would take the risk of buying a pre-owned device. There have been multiple cases where people have been defrauded by buying a second-hand device or one with preloaded funds. There is just no way to know that the previous owner will not use the wallet’s seed to access the funds on a different device. Your seed should always, and only, be created by yourself on your own device.

Liz: Can you tell me how the onboarding and transaction process works at Bitstocks’ OTC desk?

Elia: Yes, sure. Clients sign up by registering online and have a choice of two types of accounts, corporate or individual. Since we comply with recommended guidelines with regards to financial services, we require new clients to complete a personal profile in full, providing the necessary information and documentation (including KYC/AML) for our compliance team to review.

After a client has been onboarded, they deposit funds in fiat or cryptocurrency, and their wallet address is whitelisted to receive future withdrawals. Once their account is funded, they are free to trade BTC, BCH, ETH, LTC and XRP against GBP, EUR or USD. Quotations can be requested and trades placed with our OTC traders through Skype or by telephone. If the quote is accepted, the price is locked in and settled within two days (T+2). (Our new Bitstocks platform that is due for launch in 2019 will also allow traders to request quotes and secure trades online.)

If you make use of our OTC desk and we quote you £5,000 for the transaction, you will be paying exactly that and not a cent more. There are no hidden fees, and you do not have to worry how long it is going to take to fulfil the trade on an exchange, you do not have to worry about spooking the market by selling all at once.

Liz: What happens once a trade has been settled? Do I have to withdraw my funds?

Elia: At Bitstocks, we provide a custody service (cold storage) for our OTC clients. Rather than having to move coins to and from exchanges, worry about storing their coins, our clients can trade with the coins they are storing with us.

Liz: You have convinced me of the benefits of OTC! Is the service exclusively for institutions and HNWI’s, or could retail investors benefit from using OTC as well?

Elia: I have found that OTC appeals to anyone who wants access to the crypto market without the worries of market slippage, exchange slippage, and placing orders themselves. Our OTC Dealing Desk has a minimum trade size of £5,000, but beyond that, any approved client can make use of the service.

Try OTC on for Size

OTC dealing desks provide a personal service that bypasses technical requirements of buying and selling on a cryptocurrency exchange. If you are looking at getting into the crypto markets without the uncertainty and hassle of trading yourself, make sure you give OTC a try.

Why Bitstocks?

Considering Bitstocks as your Cryptocurrency Advisory or OTC provider? Learn what sets us apart.

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