How OTC trades work in the cryptocurrency market

Cryptocurrency exchanges provide a user-friendly interface for executing trades, making them convenient for all market participants. However, there is a category of users for whom convenience alone is not enough. They also require deep liquidity — the ability to buy or sell large amounts of cryptocurrency quickly without incurring significant price slippage.

For large buyers and sellers, exchange order books may not provide sufficient liquidity, so transactions may be executed at prices different from those initially expected. To address this issue, OTC trades were introduced specifically for high-volume market participants.

What is an OTC trade, and who conducts it?

The abbreviation OTC stands for "over-the-counter."

In the cryptocurrency market, an OTC trade is the purchase or sale of a digital asset outside the traditional exchange order book, conducted directly between counterparties under pre-agreed terms.

In other words, an OTC trade is executed without publicly placing a buy or sell order in the exchange's order book.

The OTC format emerged because large transactions executed through a public order book can have a significant impact on an asset's market price. For example, if there are insufficient buy orders to absorb a large sell order, the asset's average execution price will decline.

Within the cryptocurrency industry, the OTC market has evolved into a dedicated infrastructure for trading the largest digital assets, including Bitcoin (BTC), Ethereum (ETH), Tether (USDT), and XRP (XRP).

How does an OTC trade work?

An OTC transaction typically involves at least three parties:

• Client — the party seeking to buy or sell cryptocurrency through an OTC transaction. Clients may include retail investors, institutional investors, traders, companies, hedge funds, and even cryptocurrency miners.
• Counterparty — the party that executes the opposite side of the OTC trade. Counterparties may be either individuals or legal entities, similar to the client. For example, investors may purchase cryptocurrency directly from miners, while companies may sell digital assets to institutional investors.
• Intermediary — typically an OTC broker or an OTC desk (a specialized division of an exchange). The intermediary matches buyers with sellers, oversees the transaction, and ensures that the OTC trade is executed as agreed.

Stages of an OTC trade

An OTC transaction generally proceeds through the following stages:

1. The client contacts an OTC desk or broker and requests an OTC transaction for a specified volume of cryptocurrency.
2. The intermediary discusses and agrees on all transaction terms with the client.
3. Once the terms have been finalized, the intermediary begins searching for a suitable counterparty willing to execute the OTC trade under the agreed conditions.
4. After a counterparty has been found, settlement takes place between the participants in the OTC transaction. In most cases, transfers are processed through dedicated escrow accounts* or custodians (service providers responsible for safeguarding assets).
5. Once the intermediary confirms that both parties have fulfilled their obligations, the assets are released to their respective recipients, and the OTC transaction is considered complete.

* Escrow account — a settlement mechanism under which funds or assets are temporarily held by an independent third party until all pre-agreed contractual conditions have been fulfilled. Once both parties have met their obligations, the escrow agent completes the settlement and transfers the assets to the designated recipient. This mechanism reduces the risk of fraud and non-performance, as neither party gains access to the assets before the agreed conditions have been satisfied.

How does an OTC trade differ from an exchange trade?

In a standard exchange trade, the actual execution price may differ from the price at which the order was placed. For example, if there is insufficient liquidity on the exchange, a buy order for Bitcoin may be filled not at $80,000 but at $81,000, $82,000, $83,000, and so on.

Moreover, the larger the transaction volume, the greater the potential deviation from the expected price. This occurs due to slippage — a situation in which insufficient market liquidity creates a difference between the expected and the actual purchase or sale price of an asset.

An OTC trade is always executed at a pre-agreed and fixed price, even if the market price of the asset changes during the execution process.

Another difference lies in the execution speed. For relatively small volumes, exchange trades can be completed almost instantly or within minutes.

An OTC transaction, on the other hand, requires time to find a counterparty willing to execute the trade under the investor's proposed terms.

Another distinction between exchange trades and OTC transactions is visibility. Exchange trades are visible to all market participants, whereas OTC trades remain private. As a result, it is difficult to assess the impact of an OTC trade on an asset's price or on actual trading volumes.

Finally, exchange-traded and OTC transactions differ in execution procedures. Every OTC transaction is documented and carries legal force. This makes OTC trading particularly suitable for corporate clients that require proper documentation and regulatory accountability.

In summary, an OTC transaction is fully controlled, with all key terms — including price, volume, and trade direction — agreed upon before execution.

By contrast, conventional exchange trading relies on the internal mechanics of the order book. While an investor may choose the type of order to place, they cannot fully control its final execution price.

Why are OTC trades used?

One of the main reasons why large market participants prefer OTC transactions over exchange trades is the ability to minimize market impact. With an OTC trade, transaction details do not appear in the public trading history. In practice, ownership of the asset simply changes hands without directly affecting exchange quotations.

Although the impact of OTC transactions is less visible, this does not mean that it is nonexistent. OTC activity may have a hidden long-term influence on the market, as blockchain analytics tools make it possible to track large asset movements, including deposits to and withdrawals from cryptocurrency exchanges.

Another reason for the popularity of OTC transactions is confidentiality. Privacy is especially important for corporate clients, both from a business and a security perspective.

This is directly related to market impact. If other market participants become aware of a large OTC transaction, it may create additional pressure on the price of the cryptocurrency involved. A notable example was the sale of 32 bitcoins by Strategy.

The company had been accumulating Bitcoin and had not sold any since 2022, making the transaction highly significant within the cryptocurrency community. Almost immediately after reports of Strategy's Bitcoin sale became public, the price of Bitcoin fell below $67,000.

Another reason to choose an OTC transaction is the opportunity to reduce execution costs when trading large amounts. If an investor attempts to buy or sell an asset on an exchange with a single large order, the order book may lack sufficient liquidity at the current market price. As a result, portions of the order may be executed at less favorable prices, worsening the average purchase or sale price. For example, in a $10 million transaction, even a 1% deterioration in the average execution price would result in an additional $100,000 in costs, excluding trading fees.

Therefore, even if the fee charged for an OTC transaction is higher than the fee charged by an exchange, the overall transaction may still be more cost-effective. By executing the trade at a pre-agreed fixed price, investors often save more by avoiding slippage than they spend on intermediary services.

Risks of OTC trades

One of the primary risks associated with OTC transactions is counterparty risk. On an exchange, provided there is sufficient liquidity, trade execution is generally guaranteed. An OTC transaction, however, may fail if either the counterparty or the intermediary does not fulfill their obligations.

In addition, the price in an OTC transaction is determined by the intermediary rather than by the client. The intermediary may incorporate volatility risk into the quoted price. As a result, buying or selling through the OTC market may, in some cases, be less favorable than trading on a cryptocurrency exchange.

Another risk relates to regulatory procedures. An OTC transaction may be suspended or blocked by regulators at any stage — for example, during a bank transfer if the transaction involves fiat currency.

Furthermore, parties engaging in OTC transactions must understand the applicable regulatory requirements. Failure to comply may result in legal consequences for the investor after the transaction has been completed.

There is also liquidity risk. If the transaction involves cryptocurrencies that are less popular and less liquid than BTC, ETH, or USDT, the counterparty may not have sufficient supply of the asset to complete the OTC transaction, in which case the deal may not take place.