Bitcoin OTC Markets are Gearing Up for Influx of Institutional Investors
Aaron Stanley, a contributor at Forbes, has written an article about how OTC Markets are getting prepared for institutional investments. During the whole year, the market discussed how to start attracting institutional investors.
In general, crypto enthusiasts and small customers can buy virtual currencies through standard exchanges. But institutions need specific platforms and services that are known as OTC markets. These OTC markets allow them to execute larger trades in the market.
However, the market lacks the technological infrastructure and liquidity necessary to execute these big orders. Buyers and sellers of large sums have to contact different individuals in social networks in order to be able to sell or buy virtual currencies.
Monica Summerville, director of fintech research at Tabb Group, a U.K.- based market research firm, said that these larger investors should go to OTC desks. About it, she commented:
“The big deals have to go OTC. A lot of the exchanges limit the order size, so you have to break up your orders, and that’s just fatal.”
If a company wants to execute a massive trade, for example, 1,000 BTC, it will be very difficult for any exchange to be able to offer liquidity for this amount of funds at a certain price. This seller would trigger a slippage, according to Stanley, in which the price of a trade execution is different from the one expected.
A trader quoted by Stanley said that they prefer to hedge into fiat when they want to liquidate. However, there are some investors that prefer to use stablecoins, however, some of them are not regulated. Others such as tether (USDT) have been involved in different controversies during the last months.
“A lot of exchanges use banking services in different countries and geographies that aren’t necessarily respected,” the trader said. “Just because you can get fiat into an exchange doesn’t necessarily mean you can get it out.”
OTC trading desks provide services to different companies in the crypto space. Crypto miners and other users have to deal with important sums of virtual currencies and with the current infrastructure this is not possible or is highly inconvenient.
In the last twelve months, these OTC markets have grown significantly, says Stanley. There are more investors entering the space that are also more sophisticated. Some of these companies and wealthy individuals trade through brokers such as Octagon Strategy, Genesis Trading, Circle and others.
As per a report released earlier this year by Tabb Group, daily trading volume in OTC trading desks is currently $12 billion dollars globally. This is surprising because that number is reportedly several times larger than the current average daily trading volume in all standard cryptocurrency exchanges.
At the same time, it is suspected that cryptocurrency exchanges say lies about their trading volumes in order to inflate them, although this is not legal.
Furthermore, current OTC markets have a lack of sophistication and did not create a proper environment for institutions trust 100%. Indeed, operating some OTC trading desk requires trust when they have to cash out into fiat.
Frank Wagner, a founding partner of INVAO, an artificial intelligence-enabled investment vehicle for cryptocurrency assets, explained that some parts of the crypto industry are organizing six-figure trades on Skype and Telegram.
“Clearly, this can’t be the most secure and effective way to execute these trades and may be the reason that many institutional investors are deterred from getting involved,” said Wagner about it.
At the same time, working with OTC companies is also related to risks. There are some financial institutions that do not provide large wire transfers for some clients in order to be compliant with money laundering rules. Additionally, it is possible to face another issue with OTC desks. If the client process a payment, both in cryptocurrencies or fiat currencies, there is a possibility that the OTC company would go bankrupt or experience other issues.
Gene Grant, CEO of VRBEX, explained that as transactions grow larger, the process becomes more complex for the parties involved. Other experts believe that the market needs more regulations in order for institutions and larger investors to feel confident about investing in the market.
Although the markets have been operating negatively during the current year, several companies have started to build new solutions and sophisticated OTC markets, Stanley said. One of the announcements about it was made by Fidelity, one of the largest asset managers in the world. The company said that it will be storing and trading virtual currencies for institutional investors.
And indeed, the market could be operating down, but companies and the community have been building new infrastructure and better services and products. Another important company, the Intercontinental Exchange (ICE), will soon be launching the institutional-grade platform Bakkt.
In the future, new services for institutions and wealthy investors will start to appear in the market, helping virtual currencies to continue their long-term growing path.