> Blog > What’s Better – Crypto Exchanges or OTC Trading?

Published July 1, 2022

Reading time 4min


The crypto markets offer users plenty of different investment strategies to claim their share of the emerging Web3 landscape. When it comes to transacting crypto, there are two primary ways in which investors purchase their digital assets: crypto exchanges and OTC trading. While traditional crypto exchanges are the most popular way to buy crypto, OTC trading has its own unique advantages that investors may want to take part in. Let’s walk through what OTC crypto trading is and how you could benefit from it.

What is OTC Crypto Trading?

OTC trading, or over-the-counter trading, is a private market to transact digital assets directly between two parties without the use of an exchange or third party. It is a popular option for transaction among large buyers and institutional investors because of a few key advantages over crypto exchange trading.

To get a better idea of what OTC crypto trading is, let’s discuss how it works and how it differs from traditional crypto exchanges.

Crypto Exchanges Versus OTC Trading

Traditional crypto exchanges behave as a centralized entity to facilitate transactions between buyers and sellers, whereas OTC trading behaves more like a decentralized broker-dealer network to facilitate private trades between buyers and sellers. 

When buying crypto through an exchange like FTX, FTX serves as the sole facilitator for all trades running through its platform. The exchange keeps a public record book of all transactions made on the platform to hold legal accountability between all traders.

By contrast, OTC markets use a decentralized network of dealers to oversee trades between two parties. Much like the real estate market, there are many platforms offering OTC trading services that host a network of dealers to facilitate trades between buyers and sellers, just as a real estate agency has a number of different brokers to facilitate home sales. Since listings on OTC markets are not found on exchanges and there is no centralized record keeper, each transaction made in OTC can take place without others knowing the final price of the asset being traded. Along with fewer regulations on OTC markets, OTC trading is generally more private than traditional market trading, but that liquidity can come at a higher cost. 

How Does OTC Trading Work?

Traditional exchanges usually have lower levels of liquidity to facilitate transactions between market participants, and this lower amount of liquidity comes with a problem for high-net-worth investors: slippage. This means that when large orders are placed, the price of the asset being traded can fluctuate drastically, making it difficult for large investors to fill orders without affecting the price.

On the other hand, OTC crypto trading deals in extremely large volume while also avoiding slippage entirely. Buyers and sellers communicate through a chat application. After placing a request, a willing trader responds with a set price, usually defined by the current market conditions. The trader who made the initial request can then either decline, counter, or accept the offer. When both parties arrive at a deal, the OTC dealer or “desk” must facilitate the trade as legally defined during the sign-up process. This process behaves much like negotiating for a private deal at a garage sale.

Since the crypto is being sent directly from one party to another, there is no price impact on the asset being bought or sold, making it highly attractive to large buyers and institutional investors. 

For example, if you had 10,000 bitcoin to sell but wanted to maximize the amount received from the sale, trying to sell all those bitcoin on an exchange would cause the price to drop as you sold them, meaning you get less for every bitcoin that is being sold. Instead, you would want to sell the bitcoin through an OTC market, as you can set the asking price for the lot and find a bidder who is willing to pay for it.

Risks of OTC Trading

Despite the benefits that OTC markets offer, they do not come without downsides. There are three risks to consider when using OTC trading to conduct transactions:

  • Bid-ask discrepancy: OTC markets may have large discrepancies between bid and ask prices as there are no market-makers to automate transactions. Prices of bitcoin on an OTC market, for example, may be listed drastically higher or lower than what the current market value of the asset is on exchanges.
  • Limited liquidity: As a result of these discrepancies in prices can, it also means that OTC trades may have a harder time finding a buyer/seller, as the lack of an automated market maker can lead to longer wait times between buyers and sellers.
  • Counterparty risk: There is a chance that a party involved in an OTC trade defaults on their end of the deal before it is finalized, so OTC markets may not be as reliable as the guaranteed transactions offered by traditional crypto exchanges.

Although there are risks, many large market participants choose to trade through OTC markets as long as trust can be established between parties.

Trusting OTC Trading

Since OTC trading in crypto works directly between parties, trust is vitally important among its participants. Thankfully, most OTC trading platforms ensure that market participants enter the proper Know-Your-Customer (KYC) information before making trades. This gives the dealer the proper information of each party involved so that trades are conducted legally and efficiently.

After each party comes to an agreement on the conditions of the trade, the dealer ensures that each end of the deal is met so that both parties are satisfied. The trade is secured “over-the-counter” by a registered agent.

Which Is the Best Method for You?

Despite traditional exchanges seemingly being the most popular way trade among retail, OTC trading actually accounts for the vast majority of trading in the global financial markets.

While crypto exchange trading offers the most flexible and seamless trading experience for traders, OTC crypto trading gives larger buyers a more private and direct method of transacting while avoiding the slippage that comes with traditional crypto exchanges. Either trading method comes with their own unique tradeoffs. Now that you have a better understanding of what OTC crypto trading is, it’s up to you to decide what you are looking for when making trades.

FTX.com offers one of the best experiences for traders looking for either traditional crypto exchange trading or over-the-counter crypto trading. To take advantage of FTX’s OTC trading platform, head to its OTC Portal. To trade traditionally, sign up for an FTX account today.

Also be sure to join the FTT DAO community if you’d like to be part of a community that hosts events on educational content, gives back and are fans of FTXToken and SBF. 




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