Share this article

The Wizard of Oz is a favorite classic movie over the festive season. In an iconic scene, the titular character is initially presented as a “great and powerful” green head, with a booming voice, surrounded by flames and red smoke.

But when Toto tugs at the curtain, the ‘Wizard’ is revealed to be a bungling old man who isn’t great or powerful, or even particularly good at magic. Dorothy placed her hope in a person whose power rested on a well-maintained illusion. Her quest for a return to Kansas doesn’t rely on external forces – it’s just a question of tapping her shoes.

Like Dorothy, markets can fall for illusions too. One of the most enduring and misunderstood is the over-the-counter (OTC) market for cryptocurrencies, and in particular Bitcoin (BTC).

An OTC trade is a transaction that takes place privately off-exchanges. It comprises a buyer and seller and – sometimes – a broker to mediate between the two parties. The main advantage of the OTC market is that it’s a private affair between the involved parties. Large trades will generally move the price of an asset on exchanges – but through OTC, parties can trade with minimal market disruption.

Although there’s no definitive metric, OTC market participants are often institutional players, family offices, or high-net-worth individuals (HNWIs), otherwise known as ‘whales’.

Many people believe the OTC market to be huge, with trading volumes far larger than those on exchanges – but what exactly constitutes the OTC market is often unexplained.

Insiders say the reality and the illusion are confused by the fact that there are two types of OTC trading – and while brokerage trading is described (by multiple sources) as “bullshit”, the principal market is very green, very powerful, and very much the Wizard of L. Frank Baum’s imagination.

Principal OTC: The Real Money

Principal trading is where the money’s at. One report, published in April by the research and consultancy firm TABB, suggested the OTC market for Bitcoin was approximately triple the size of the exchange market.

But at QCP Capital, one of the most active digital asset traders in Asia, Head of Trading Darius Sit confidently declares that the OTC market for principal trading is nine or ten times the size of the volume that mere mortals see on CoinMarketCap on any given day – and since CMC is widely-considered to present inflated volume, the real multiple could be even higher.

“OTC market makers account for up to 80% of true crypto trading volume,” says Sit. “This means there’s no bullshit escrow, proof of coin or funds – instead you work with a professional trading desk that provides a price for a large size trade, for example anywhere from 500k to 20m USD in a single clip, off exchange with minimal impact on the market.”

Sit is adamant that despite (or perhaps because of) the crypto slowdown, the proportion of trades conducted OTC has actually risen. “OTC trading has gone up with the huge use case for stablecoins in Asia – these tokens are being traded in huge volumes very actively off-exchange.”

Principal trading at the large scale – where the likes of QCP, Cumberland, and Octagon operate – depends on bank-grade KYC and AML, since the firm itself (or its liquidity provider) is taking on the risk of the transaction. Unlike brokers, principal firms make a market for the trade – and the price provided includes the assumption of risk and potential slippage.

OTC Brokerages: Where Money Talks And Bullshit Walks

A broker is someone who finds a buyer, finds a seller, and then takes a cut when he or she hooks the two up. They’re the Tinder of crypto: matchmaking where they can, always looking for new fish.

One firm that deals in these sort of trades told Crypto Briefing that the OTC brokerage market isn’t as big, or anywhere near as glamorous, as people think. David Thomas and Karl Thompson are the co-founders of Global Block, a Mayfair-based cryptocurrency broker. Established in February 2018, one of the services they provide is an OTC brokerage acting as an intermediary to enable the deal to take place smoothly.

Thomas, who comes from a forex background, and Thompson, who was previously in equities, say the OTC brokerage market is generally comprised of inexperienced parties that can be difficult to work with. Whereas the traditional markets have streamlined procedures, no such thing exists in the cryptocurrency sector.

This is made worse by a lack of experienced deal makers and brokers, which can sometimes lead to bizarre requests or outcomes. Thomas said that a good example was one person who wanted to do the initial meet in the lobby of a Zurich hotel the following morning; “even though he wasn’t actually based in Switzerland”, he adds.

Thomas explained that the vast majority of OTC trades are baseless. “I would say 95% of trade in the [OTC] space is all bullshit”, he said. In their experience, many people who approach them with a potential deal are not the real sellers, or don’t actually have the amount they say they do.

In one particular deal, Thomas says, two Global Block associates had arranged to meet a proposed seller at the end of the day to discuss terms and confirm proof of funds. After two hours of waiting and being told he would be there shortly, they left and found him in a nearby pub. “The guy was basically getting pissed and didn’t even have the funds on him”, he said. “I know so many people who have wasted a lot of time on what turns out to be these type of OTC trades”.

A Lack Of Trust

Crypto Briefing spoke to other firms involved in the brokerage market. Albert Song is the Business Development Lead for GSR, an algorithmic digital asset trader. In an email, Song agreed that the vast majority of OTC trades don’t actually happen; one of the main issues that they come across is the seller not having the funds.

“99% of OTC deals do not go through”, wrote Song. “From what we’ve gathered, there also seems to be a mishap at the last second, in which either the buyer doesn’t actually have enough funds to complete the trades, or the coins were not real. It’s hard to say whether deals are fake unless one defines deals that are not successfully completed as fake. However, some of the trade notionals, economics, and procedures of OTC deals floating around the market certainly seem questionable.” According to Thompson, part of this difficulty stems from a lack of trust in the sector. Established financial markets can rely on a trusted centralized counterparty, like the London or New York Stock Exchanges, but there is no such equivalent in cryptocurrency. “People are very guarded with their flow, which makes it hard to broker any sort of deal,” he says. Although large trades – tens, or even hundreds of thousands of Bitcoin – may occur occasionally, Thomas says they can take a long time to put together. As well as proof of funds, it can take time for the legal teams to draw up the contracts and, in some cases, prepare non-disclosure agreements (NDAs). The number of people who can sometimes be involved in one individual trade can slow things down even more. For Thomas, most OTC trades are far smaller than people think. The “sweetspot” that they look out for ranges between 100-1000 BTC. Any more than that and it’s unlikely that the seller has the funds. “Most of the time it’s a potential deal with a mate of a mate who has something like 20,000 BTC they want to sell,” Thomas said. “It’s like people think you came down in the last rain shower”. Song agrees with this, saying that it’s highly unusual to hear about a Bitcoin OTC brokerage trade going above 1,000 BTC. “With the exception of a few blocks here and there, I’d agree that the average trade size falls below 1,000 BTC,” he wrote. “This may change depending on what’s going on in the market and price action. While there are certainly exceptions, most trades we hear about are between 100 and 1,000 BTC.” Not Measuring The Unmeasurable Unlike exchanges, where anyone can see real-time trading data, there’s no way of knowing the true scale of the OTC market. Like public exchanges, it almost certainly fluctuates based on market sentiment and developments. There’s just no way of being able to show this conclusively. Darius Sit suggests that it wouldn’t be an exaggeration to say that “99.99% of the notorious ‘I-have-10,000-BTC’ to buy/sell block trade deals are fake”. Both Song and Thomas agreed that in brokerage, a lack of trust and standardized procedures means miscommunication is a problem. Trade deals that should only really involve a buyer, seller and broker, could sometimes have many more parties all looking for a commission. Song said that this often created long and complicated chains, which also prevented many OTC deals from taking place. He said: “Whenever that happens, information becomes skewed and its transfer is delayed, and brokers tend to make it difficult to get to the actual end buyers and seller due to fear of getting cut out”. Without any real information, the sector can blow the brokerage market’s significance way out of proportion. Instead of a mighty figure dwarfing a market predominantly made up of retail investors, OTC brokers could be far smaller and somewhat less mysterious. But peel back that curtain on the principals trading market – and you’re really not in Kansas anymore. Additional material by Jon Rice. The author is invested in digital assets, including BTC which is mentioned in this article. Join the conversation on Telegram and Twitter