Since Bitcoin burst onto the scene a little over 10 years ago, its role has expanded to become a major commodity, with increasing links to global financial systems. Even now, it’s hard to say what exactly drives bitcoin’s price. Some people name peer purchases, nascent technologies, and regulations as key influential factors. However, when we combine all of these, it’s still impossible to correctly predict Bitcoin’s price. The reason is that there are way too many other less-obvious factors at play, one of them is the prevalence of over the counter (OTC) transactions, which involve hundreds of millions of dollars worth of coins on a daily basis.
In this article, we’ll shed some light on OTC trading and compare it to that which is done on a crypto exchange. The bitFlyer platform allows us to run a direct comparison, as it comes with two separate products: bitFlyer Lightning - a crypto exchange (Japan’s biggest, with over 2 million satisfied users) and Buy/Sell - bitFlyer’s Over the Counter trading platform.
Over the Counter (OTC) Trading
Over the Counter or simply OTC, is the favoured bitcoin trading avenue for big money investors (often referred to as whales). These are people who don’t want to deposit a large amount of funds in online cryptocurrency exchanges. Instead, they prefer to carry out direct trades with each other privately.
Typically, OTC is traded through a dealer network, characterised as less transparent and with less regulation. However, now there are other ways of OTC trading, which we will describe below. Needless to add, OTC trading has become so popular and profitable today that crypto miners have, in increasing numbers, gone on to found their own OTC trading departments.
How does OTC trading work?
Here are three of the most popular ways to trade OTC:
- Brokers: This is the most common method used to trade OTC. The most famous brokers engaged in OTC trading include it.bit & HiveEx.com.
- Сhatrooms: Typically, chatrooms are used as trading networks that allow peer-to-peer transactions. Just for the record, the first major Bitcoin OTC trade took place in an IRC chatroom called #bitcoin-otc.
- ATMs: A bitcoin ATM allows simple conversion from fiat to crypto without going online. You can use this online tool to find the nearest bitcoin ATM.
What are the key benefits of Over the Counter crypto trading?
- Almost instant transactions without limits: Most traditional crypto exchanges place a limit on the maximum amount a user can trade per day, as well as on the amount that can be withdrawn from an account in a 24-hour period. With OTC, you don’t have those limits, and all operations are conducted almost instantly, depending on the speed of blockchain processing.
- No slippage: Traders know that there will be no discrepancy between their order, and the final price they have to pay.
- It’s easier and often cheaper to trade high volumes: The cryptocurrency market is still in its infancy, and there is not always sufficient liquidity available on exchanges to process large trades.
As we have seen, OTC trading brings some meaningful benefits for both small and big traders. bitFlyer’s Lightning crypto exchange brings benefits of its own for more advanced cryptocurrency traders. Below you will see some of the main features that users can take advantage of.
bitFlyer Lightning Crypto Exchange
bitFlyer Lightning is a feature-packed exchange (trading platform) where professional traders can buy or sell bitcoins. The exchange rates are determined by the balance between supply and demand. The practice is similar to retail foreign exchange (FX) trading.
bitFlyer’s crypto exchange comes with unparalleled usability, advanced security, and all the features that avid traders could want. The key trading tools are as follows:
- Order book: It’s a tool that visualizes a real-time list of outstanding orders for a particular asset. You can check it to get a better understanding of the current market price and set your own bid, depending on your read of the current trajectory.
- Price graph that has daily, YTD and MTD capabilities: Year to date (YTD) refers to the period of time spanning the first day of the current fiscal or calendar year up to the present day. Month to date (MTD) is similar but focuses on the current month. You can display your daily, or YTD/MTD calculations in a chart to better analyze and predict the price of a certain asset at some point in the future.
- Different order types, such as limit and stop-limit. A limit order is an agreement that you make with an exchange to execute a trade at a certain price point or better. If that price point is never reached, your order may never be executed. If it does take place, the price is not guaranteed. Limit orders allow you to set a time limit on the order, after which the trade won’t be executed at all. It can be used to both buy and sell. A stop-limit order is an order that will be executed at a specified (or potentially better) price after a given stop price has been reached. Holders set two prices with a stop limit order; the stop price and the limit price. If the limit price takes place, the price is guaranteed.
Let’s make this easy by using two practical examples:
- Ann has bought BTC at $5000 on bitFlyer and she places a limit order to sell it at $7000. However, she is not sure whether the price will go that high.
- The latest BTC trading price is €6000, and the resistance is around €6100. If you think that the price will go higher after reaching the resistance, you can put a Stop-Limit order to automatically buy more BTC at the price of €6110. This way you won’t have to continuously watch market movements waiting for the price to reach your target.
- Conditional order types (IFD (“If Done”), OCO (“one cancels the other”), IFD-OCO). A conditional order is an advanced trade order which is automatically submitted or canceled if specified criteria are met. It lets you set order triggers for stocks and options based on the price movement of stocks, indexes, or options contracts. Typically, conditional orders are used when it is important to automate part or all of the trade entry/exit order entry process.
- Your personal Profit and Loss (PnL): You can check this to value your ultimate trading positions. For example, your trader positions were worth $100 yesterday and today they are worth $105. So your PnL for the day was $5. With more complex trades and greater sums, the need for this tool becomes clear.
Despite the advanced features crypto exchanges afford, there are still some disadvantages that can’t be dismissed. The key cons include:
- Trade restrictions: on bitFlyer Lightning, as on the majority of traditional exchanges, there’s a limit to the maximum amount you can trade per day. For large traders, it can be a problem.
- Withdrawal limits: there’s always a limit on the minimum and maximum amount of money you can withdraw per day.
- Long processing time for orders: some orders can take longer than expected to be processed.
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