OTC Trading: An Inside Look at How Whales Move Bitcoin

A recent conversation shone a new light on over-the-counter, or OTC, bitcoin trading — suggesting much of the large-scale movements between fiat and cryptocurrencies happens away from the exchange books.

Also read: 4 Reasons Why Bitcoin is Outperforming Everything

Entrepreneur and well-known bitcoin investor Vinny Lingham — co-founder and CEO of Civic Technologies, and former CEO of Gyft — highlighted the issue with a blog post on June 27 titled, “The 1% Don’t Use Bitcoin Exchanges.”

Lingham confirmed what anyone who has spent years watching bitcoin already knows: that there are very wealthy people out there investing in bitcoin, and they’re keeping it low-key. Serious money is moving into cryptocurrency.

His main point, however, was that the regular (ie: on-exchange) bitcoin market is simply not large or liquid enough yet to process large trades. To place a seven-figure dollar trade would shift the price in a direction unfavorable to the trader before the trade is completed, a phenomenon known as slippage.

In fact, “regular eight-figure trades are now common” on the OTC market, he wrote. 66 percent of the OTC trade this year has been buyers, and more entered the market after last week’s “Brexit” decision without having a huge impact on the bitcoin price.

Lingham, who says he’s been “pretty on-the-money” with past bitcoin price predictions, is extremely bullish about the near future, tweeting: “It’s straight to $1151 now… very little pausing.”

He clarified the prediction was predicated on the price breaking above $726 – which he realized happened due to the OTC market masking real volume. $1151 will still happen, but not until after sustained breaks above $726 and then $830.

OTC for Whales, Exchanges for Everyone Else

So who is using bitcoin exchanges? Are they only for high-volume algorithm trading, day-traders and amateurs?

Lingham told us that it’s probably all of the above, but essentially just regular people — the 99 percent — or people who want easy exchange but don’t need to execute major positions. OTC dealers do use exchanges too, as market-makers.

When will liquidity in the bitcoin marketplace reach levels where large-scale orders can be executed? Lingham said:

Predictions are largely guessing for bitcoin, albeit educated sometimes. I would rather say that the conditions for this to exist appears to be in the $3-$5k/BTC range from my best guess.

It’s definitely a price issue, he noted, and not an attempt to avoid regulation. Most well-known OTC dealers still have KYC/AML requirements.

This is largely a market and liquidity issue but high net worth US and UK individuals and family offices would also not setup accounts at large unregulated exchanges, regardless of liquidity. They would rather use a trusted broker or intermediary to execute the trades. MTGox is not yet a distant memory.

Who are the Dealers?

Lingham referenced Harry Yeh’s Binary Financial in his piece. Another large player is New York-based exchange itBit, which launched its OTC trading service in July 2015.

ItBit publishes monthly statistics and reports on its OTC activity. In May 2016, it saw 19,710 BTC and $8.7m traded, with an average of 635 BTC per day.

May was actually a low month for itBit OTC. The peaks were in February and April 2016, especially February, which recorded 66,230 BTC and $26.4m traded, average 3,153 BTC per day.

While bitcoin prices have been rising since the beginning of 2016, this bullish behavior probably wasn’t reflected in the on-exchange bitcoin price until May, when it began to soar once again.

Also of note is that 75 percent of itBit’s May OTC traders were institutional investors. The US, Canada, UK and Australia were the largest traders, but there was also a surprising amount of OTC activity from India, Japan and the Southeast Asian region.

Always Remember China

One should never underestimate China’s influence in the world bitcoin market.

Though it has kept a low-profile and is yet largely unknown globally, Richfund.pe claims to be China’s (or even the world’s) largest bitcoin hedge fund and liquidity provider. It also functions as a market-maker for exchanges and engages in large-scale OTC trading.

Richfund’s overseas marketing manager Kong Gao also spoke to Bitcoin.com about his company’s experiences, which have been going on at scale for some time and probably impacted the regular price:

We had a customer back in 2013 who bought 100,000,000 CNY ($15.1m) worth of bitcoins from us in 15 tranches over a one-month period. This trade raised the bitcoin price from 3,500 CNY to 5,000 CNY ($527-$753). He bought about 25,000 bitcoins in total and stored them in five different addresses. There are many trades between 500 BTC to 700 BTC. In addition to direct OTC service, we also help other OTC traders hedge their bitcoin position and these ranges from 5,000 to 2,000 bitcoins. And recently we had a trade of 140,000 euro.

Even though the 2013 trade shifted the price, at that time trading such an amount on public exchanges would have caused slippage too great to make it worthwhile.

Richfund charges a 2 percent commission on USD trades via international bank wire (usually using Bitfinex prices as a guide) though it’s higher for GBP and EUR. Exact rates may be negotiable based on the amounts required and how regularly a customer trades.

Additionally, we have a wide network of traders working with us in Europe and Mexico who can trade cash for bitcoin for us. Of course for cash trading, our rate is higher. Yes, we do negotiate different rate for everyone. There are many factors to take into account and these factors revolve around the status of our existing network of traders and cash holdings. Of course, to stay competitive, we offer the best rate possible for every trader trading with us.

Bitcoin Iceberg Signals a Bright Future

Kong said Richfund’s OTC mission is to provide liquidity to traders to scale up their trading volume, thus making greater profits. It probably also means greater returns for all bitcoin holders in the longer term.

The lessons to be learned here are: there is always far more to bitcoin than meets the eye, the world’s “1 p” of high net-worth individuals have definitely noticed and have been buying up for years, and bitcoin is a far more serious business than the mainstream media reports.

Regular exchange traders may feel at the mercy of these large movers and shakers, but ultimately they signal a confidence in bitcoin beyond what is readily visible – which bodes well for the future.

Does all this behind-the-scenes activity give you more confidence in bitcoin and cryptocurrency in general? Would you like to dabble in some off-exchange trading yourself?

Featured image via Wikimedia Commons.