Bitcoin OTC trading is believed to surge in 2020 as today crypto derivatives exchanges provide clients with high transparency ratings and impressive security.
The early Bitcoin exchange landscape was comprised of only a handful of venues that were prone to hacks and lacking in both liquidity and features. Mt. Gox was the start of what would eventually become a laundry list of hacks, exit scams, and bizarre quandaries like QuadrigaCX that plagued the crypto markets.
Naturally, the security woes and a lack of market infrastructure cast a hesitant lens for institutions that were curious about Bitcoin and its concomitant class of digital assets – but no longer. The scene is much different today.
Crypto derivatives exchanges are pushing the boundaries of trading innovation, liquidity on exchanges with high transparency ratings is impressive, security is drastically improved, and an ecosystem of OTC brokers, institutions, and custodians is thriving.
The year 2020 has been a wild ride, and the crypto markets already suffered a severe crash in mid-March alongside the S&P 500’s historic plunge. So, why the optimism around the Bitcoin and the blossoming OTC market?
Bitcoin OTC desks are what whales and institutions want, and it appears that the narrative of institutions entering crypto is poised to actualize.
Financial Uncertainty & the Halvening
The first quarter of 2020 was nothing short of spectacular in both crypto and legacy markets. Government-mandated quarantines, supply chain disruption, demand/supply shocks, and general COVID-19-induced fear drove down stock indexes at a historic clip and threw credit markets into haywire.
The Fed stepped in to save the day, and, alongside the Treasury Department, is in the process of injecting trillions into the economy to keep it afloat.
The crypto market was not left unscathed either. Bitcoin dropped roughly 50 percent in a single day, causing a few over-leveraged crypto funds to close their doors. But Bitcoin rebounded to around the same level before its crash, and without any stimulus help. Similarly, Grayscale’s recent Q1 2020 Digital Asset Investment Report revealed the firm’s biggest quarter ever-accumulating over $500 million invested into Grayscale products.
The charge into Grayscale was led hedge funds, with 88 percent of inflows coming from financial institutions, and Grayscale citing hedge funds as the “overwhelming majority” of participants. Interestingly, the massive growth experienced by Grayscale coincides with the run-up to Bitcoin’s halvening event, where the block reward will be reduced from 12.5 BTC per block issued to 6.25 BTC – the third such event of its kind that will lower Bitcoin’s inflation to roughly the same level as gold.
And while the parallel developments could be a coincidence, increasing volumes of evidence are proving otherwise.
For example, stablecoins are exploding in growth right now. Tether’s market cap is now over $7 billion, and the broader market is around $9 billion. Some analysis compares the stablecoin surge to the need for a volatility hedge against BTC following is mid-March freefall, others relate the demand for stablecoins to Eurodollars, and some indicate a supply-demand squeeze in anticipation of fewer BTC supply available on exchanges.
All of the developments bode well for the blossoming Bitcoin OTC market.
Return to the Familiar Trust Relationship
At its core, the cryptocurrency movement is based on a “don’t trust, verify” maxim that relies on minimizing the trust placed in third parties when possible. The grassroots ethos applies well to a variety of situations, but not trading or onboarding more users to crypto. At least, not yet, especially when applied to institutions and whales trading large sums.
P2P exchanges don’t compare to their centralized counterparts at all when it comes to liquidity, and KYC/AML costs for fiat-to-crypto gateways can usually only be shouldered by large exchanges (e.g., Coinbase, Kraken, etc.) in the U.S. However, from an institutional perspective, trading on centralized crypto exchanges also causes headaches.
For example, price slippage is an endemic problem whenever trading with size. It’s a worse problem in crypto markets that, while relatively liquid, do not compare to legacy markets. Similarly, institutions don’t want to move markets with block trades; they often prefer privacy because they don’t want to be front-run, and sourcing spreads from multiple markets isn’t possible when trading on a single venue.
Bitcoin OTC Brokers Enter the Game
Going back to the earlier case of the looming halvening, supply-demand squeeze, and exploding stablecoin growth, it appears that institutional interest in Bitcoin is here. With institutions anxious to join the market before the halvening, OTC brokers will be their preferred choice for large trades. Why?
Legacy financial institutions are accustomed to the trusted relationship of OTC brokers. When the “trust-minimized” narrative of crypto only creates headaches for institutions trading in size, they turn to what they know. For example, Su Zhu of Three Arrows Capital recently detailed in a piece for BTC options exchange Deribit:
“Trust enables the broker to cater to their clients’ specific needs, and it also enables the client to bestow on the broker highly secretive information. This cannot be replicated or improved upon by decentralization–in fact, it is its very antithesis.”
Zhu then goes on to explain how he believes OTC volumes will rise in comparison to exchange-based spot trading – a conclusion that Bitcoin OTC firm, IBIS Brokers, shares. And IBIS Brokers provides an excellent practical lens to view the advantages of OTC trading for institutions.
Based in Malta, IBIS is a concierge-style OTC Bitcoin trading desk for clients mostly situated in Europe. In fact, it’s one of Europe’s largest OTC Bitcoin brokers. Their core business model is straightforward – quote and fill trades for clients in sizes up to 1,000 BTC.
“The company was spun off from ICO Launch Malta as its Bitcoin OTC trading business overtook the core activity’s size by several orders of magnitude,” details Jan Sammut, Founder of IBIS Brokers. “There’s no real lightning-bolt inspiration story here. Rather, the business just grew organically over a few years as we developed a reputation for being trustworthy, trading honestly (never front-running or counter-trading our clients), and, most importantly, having access to the deepest crypto liquidity pools in the business.”
Sammut’s statement is precisely the type of pithy observation necessary to point to why Bitcoin OTC trading is poised to explode. Liquidity and trust, that’s what institutions are looking for once they decide to dive into the Bitcoin market. Privacy and personalized services flow from the trusted relationship between client and broker. The case of liquidity is critical too.
For example, OTC brokers can quote tighter spreads than when an institution trades on a single venue, and OTC desks source liquidity from deep liquidity pools.
“Trades are executed within our ring-fenced liquidity pool, allowing our clients to place Bitcoin trades of all sizes in complete security and privacy,” continues Sammut. “Our Bitcoin OTC desk is directly integrated with the world’s largest Bitcoin liquidity pool, allowing us to fulfill any order size from 1 to 1,000 BTC with minimal slippage, and price guarantees for orders over €100,000.”
Unsurprisingly, that’s is also why many centralized exchanges rushed to produce OTC desks once the likes of Kraken and OKEx started ballooning in popularity – the demand for Bitcoin OTC desks is palpable.
Throw in a dash of global financial uncertainty (where Bitcoin can function as a long-term hedge), a looming halvening event, and record flows into stablecoins and Grayscale, and the picture of why Bitcoin OTC trading is poised to surge in 2020 begins to crystallize. It may be the lure of a “trustless” cryptocurrency ethos that attracts institutions to crypto in the first place, but it’s the age-old trusted relationship between client and broker that will convince them to invest with size.
Having deep expertise in intercultural communications, Natallia is fond of foreign languages and cultures. She strongly believes that people should continually develop to stay on track, that’s why she permanently widens her knowledge in various spheres. Currently, Natallia is fully immersed in crypto, blockchain and financial techs.