Bitcoin OTC trading

As much as half of all crypto trades take place in secret, behind closed doors.

The trades are executed quietly, with billions of dollars worth of crypto changing hands outside the main exchanges. According to many experts, including Binance CEO Changpeng Zhao, this means the crypto trading market is twice as big reported.

Welcome to the mysterious world of OTC crypto trading, or “over-the-counter” trading where bitcoin “whales” buy and sell ludicrous amounts of crypto between each other.

Very little is known about OTC trading, how it works, or its true effect on the market. 

During my research, I spoke with OTC expert Mark Sapolinski, who has organized bitcoin OTC deals since 2012 and currently manages an order book worth about $2 billion. 

During our energetic conversation, I gained several precious insights into the mysterious world of over-the-counter trading that I’m now about to share with you.

What Is Bitcoin OTC Trading?

In a nutshell, OTC, or “over-the-counter” trades are private deals for buying and selling cryptocurrencies. They are not done through regular exchanges and are therefore not displayed in any public order book, which means increased privacy for both the buyer and the seller.

Some estimates suggest that the volume of crypto traded on OTC markets is two-three times larger than regular exchanges.

OTC Transactions are Private and Have Lower Impact on Market Price

Apart from the improved anonymity, another reason to trade in this way is to minimize the impact on the market itself.

Trades worth millions or even billions of dollars would inevitably move the price in the opposite direction of your need. Nowadays, it appears that a large share of the OTC volume comes from only a few hundred massive transactions. 

As a result, many “whales” seek private deals that will not affect the market as much as deals on regular exchanges.

Further reading: Who are the Bitcoin Whale? (Criminals, Traders, & Early Adopters)

How are OTC Trades Executed?

At the moment, there are two different ways to handle OTC transactions: through a middleman or by using big online platforms. 

OTC brokers, the men in the middle, have their very own network of crypto investors and cryptocurrency sellers. They constantly keep themselves up to date with who wants to sell or buy coins, how much they want to deal with and when they want to pursue the deal.

It’s a very personal, bespoke service.

In the end, they want to match a crypto buyer with a crypto seller and take a commission for the service. Unfortunately, dealing with OTC brokers usually takes a lot of time. Establishing trustful relationships is a key element of conducting business in this way.

… Or Through an Online Platform like Circle

On an OTC platform, the intermediary will be replaced by a software platform. Think of it like Coinbase for the uber-rich. Perhaps the best-known crypto OTC platform is Circle, but even Coinbase has quietly opened an OTC trading desk.

Circle OTC bitcoin trading

In this method, algorithms will match buyers and sellers, and trades will usually be conducted over the platform. Just like with OTC brokers, the platform will take a fee for setting up the deal. 

The main downside of using a platform instead of a broker would be the omnipresent risk of a hack, as we have seen in the past. 

Additionally, one should always make sure that the platform is compliant with the current regulations, such as KYC and GDPR, since authorities might crack down on it otherwise.

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The History of Bitcoin OTC Trading

Many crypto people believe that engagement in OTC deals requires them to be a high net-worth individual, or, in other words, a whale. 

You might be surprised to know that one of the most popular and oldest OTC markets is actually for the small fishes: LocalBitcoins. The popular platform matches local bitcoin buyers and sellers since 2012 and still serves more than four million users worldwide, as recent reports have shown.

Especially in the first few years of Bitcoin’s life, OTC transactions appeared to be the most common way of trading the digital currency. “At this time, OTC deals were done completely different than now,” says Sapolinski. 

localbitcoins logo

From Small Trades to Multi-Million Dollar Deals

From 2013 to 2016, the number of Sapolinksi’s clients ranged from 1,000 to 2,000 clients a month, but with rather small order sizes of $1 to $50,000 dollars. As Sapolinski later explained. “I remember a general negative stigma for doing Bitcoin transactions in these years. There were not many questions asked.” 

2017 would be the year that brought change to the cryptocurrency market. Easier methods of buying and selling small amounts of bitcoin cropped up, like Coinbase and Binance.

Meanwhile, with continuously rising prices of bitcoin, there was suddenly a greater need for larger purchases, larger amounts. The new, vastly wealthy bitcoin whales needed a place to trade.

The OTC space changed from quantity to quality. Fewer clients, bigger transactions. However, with great power comes great responsibility. “As Bitcoin was now traded in unbelievable monetary value, it also became a liability to report big transactions to banks and financial authorities,” Sapolinski mentioned.

How Does a Bitcoin OTC Transaction Work?

As explained, the most popular way of conducting large OTC transactions during the past few years was using OTC brokers. 

According to Sapolinski, bitcoin and other cryptocurrency OTC trades usually follow a traditional discount model. Using an example name of “Bob,” here’s how it works:

Bob wants to sell a large amount of bitcoin. He’ll offer a discount of about 3% against the market price to do so. In order to make such a transaction, Bob will first look for an intermediary, an OTC agent, that he can personally trust. 

Bob needs to provide his trusted intermediary with a proof that he actually owns the bitcoin he wants to sell, which is also known as a “Satoshi Test.” Satoshi Tests can be done by conducting a small transaction from a wallet with the alleged funds.

At the same time, there is a buyer somewhere hoping to find a person willing to sell their precious coins or tokens. 

That person, let’s call her Alice, will also find a trusted intermediary herself. She will also provide proof of funds. Both intermediaries will now find each other through their complex black book of contacts. They’ll start negotiating with each other. 

However, there is still an inherent problem with every OTC deal that is done through two different middlemen: the buyers and sellers are often not able to trust each other.

Can You Trust an OTC Deal?

This is where the “OTC Tango,” as Sapolinski calls it jovially, starts. Both parties are expecting the information they need from the other party, which could either be a proof of coin or a proof of funds. 

The problem is: they will only provide each other with this highly private information if they feel absolutely comfortable in trusting each other. 

In many cases, buyers and sellers are separated by several thousand miles, sometimes there’s even a language barrier. It is now the time to find a base of trust, which can be pretty hard if you are not able to properly meet. 

This can usually be achieved by leveraging the network of colleagues that brokers already have a trustful relationship with. Otherwise, trust can also be established through honesty, transparency and the documentation that is provided.

What About OTC Platforms Like Circle?

Although working with intermediaries has been the crypto OTC method of choice for most of the last decade, it seems like OTC platforms are steadily gaining more influence and power.

This may be due to the fact that large institutional investors would most probably prefer using an OTC platform rather than working with middlemen. 

Many financial heavyweights fear the severe trust issues that come with regular cryptocurrency OTC deals. In order to provide a suitable solution for such clientele, many companies started working on fully regulated and secure electronic bitcoin OTC exchanges. 

As explained, Goldman Sachs-backed Circle is probably the best-known cryptocurrency OTC desk. In April this year, Circle Trade told Business Insider that their minimum transaction size moved to $500,000, with the average trade being valued around $1,000,000.

Another interesting project is Republic Protocol. The team is currently building the world’s first decentralized dark pool, which aims to be a fully anonymous OTC platform, expected to work with smart contracts, and hence eliminates any possible trust issues for its users.

Republic Protocol bitcoin OTC trading

What Impact Do OTC Transactions Have on Bitcoin Price?

While unlisted transactions should theoretically not affect prices of cryptocurrencies, the past has clearly shown that it doesn’t work that way in the real world. 

Imagine a whale that is sitting on thousands, if not tens of thousands, of bitcoins that he wants to sell. Due to the incredible amount of bitcoin he wants to sell, he will contact multiple OTC brokers to find him one or more trusted buyers. 

The word about this deal will slowly spread and some bigger investors might now start to sell their bitcoins in order to participate in that deal and obtain bitcoin at a steep discount. 

As you see, OTC deals might have an impact on the price of bitcoin, but they could also be completely excluded from it. 2018 was undoubtedly a year that brought many innovations to the world of crypto over-the-counter trades and it remains to be seen how the space develops in the years to follow.

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Gatecoin's interface

Founded in 2013, Gatecoin is a Hong Kong based cryptocurrency exchange that finds itself at #25 on BlockExplorer’s top 25 exchanges of 2017 list. Gatecoin offers a good number of trading pairs and an API for programmatic trading. Of the 90 trading pairs Gatecoin offers, there are both crypto/fiat and crypto/crypto offered, with the crypto/fiat pair’s fiat side being one of USD, EUR, or HKD.

Gatecoin has a respectable number of trading pairs and offers an API for programmatic trading. Which makes it a good choice for any traders located in Hong Kong, especially those looking to trade programmatically.

Gatecoin

gatecoin cryptoURL: gatecoin.com
Launched: 2013
Trading pairs: 60
Deposit Fees: Yes
Withdrawal Fees: Yes
Trading fees: Yes
Verification: Yes (Three levels)
Margin Trading: No

Fees and Limits

Fee wise, Gatecoin charges fees based on the trader’s volume over the last 31 days. Unlike some other exchanges, the 31 day period is a rolling one, meaning that you do not have to wait an entire period if you have significantly changed the volume of your trades. Fee levels are broken into the standard maker/taker distribution, where the taker pays a higher percentage than the maker. On the low end, 50BTC/31d, makers pay a fee of 0.25% and takers pay a fee of 0.35%. And on the high end, 20,000+BTC/31d, makers pay 0.02% and takers pay 0.1%. A complete breakdown of the trading fees charged can be found on Gatecoin’s fee page.

For deposit and withdrawal, Gatecoin only seems to charge fees for fiat. The fees paid depends on the transfer method, for example, there is a 1EUR deposit and 5EUR withdrawal fee for SEPA based deposits and withdrawals. The full list of fees can be found on Gatecoin’s transfer costs page.

Limit wise, accounts are limited based on their verification level. For crypto, you can transfer an unlimited amount as soon as you have completed tier 1 verification. And for fiat, tier 1 accounts are limited to $50,000USD or equivalent, which is upped to $100,000USD or equivalent for tier 2. There is no indicated timeframe for these limits.

Registration

Gatecoin’s registration method is a multi-step process that requires a decent amount of personal information. Registration cannot be completed without providing said information.

The first step is an email and password and is input from the normal registration form. Once you have completed the initial registration, you will be required to go through a further five steps on login. Each step requires some personal information from you. With the first step requiring your first and last name, your date of birth, and your current nationality. Following step 1, step 2 requires contact details, specifically, your address and phone number. Step three is simple and requires you to confirm an email address for your account. While step four is essentially verification for level 1, requiring a scanned copy of a photo ID and some proof of residence. And lastly, step five is a questionnaire asking for information regarding your source of funds.

Verification

Gatecoin has three verification tiers, where the first is no verification, the second is “verified”, and the third is “Certified”

Tier 2 verification requires a photo ID no older than ten years, and a proof of residence no older than three months, and a filled out ‘source of funds questionnaire’. Tier 2 is completed as a part of the initial account registration process.

“Certified” verification requires the same documents from Tier 2 to be mailed in as certified hard copies. Once the certified copies of the documents have been received, a video conference based verification takes place. During the Skype call, you will need to show your ID to prove that you are who you say you are. Alternatively, Hong Kong residents can have their documents certified at Gatecoin’s office.

Interface

Gatecoin’s interface is a bright white with two-toned blues for highlights, there is no dark mode offered. The bright background makes the interface difficult to use at night or in dark settings. The trading interface itself is well balanced, with a decent amount of information provided. As for the layout of the trading interface, it is split into four sections. The upper left section holds an order submission form. And on its right is the currently selected trading pair’s order book. On the lower half, there is a trade history on the left and a chart on the right. Along the top of the page is the pair selection dropdown, as well as a small overview of the current ask, bid, volume, high, low, and last trade for the currently selected pair.

Security

Account security wise, Gatecoin offers 2FA by means of Google Authenticator. Gatecoin offers a very granular account security configuration tool that allows you to specify what account actions will be logged via email, require confirmation via email, and require confirmation via 2FA. Granular controls are a welcome sight and make securing your account very easy. Gatecoin also states that all user funds are stored in per-user accounts on their side.

Bitcoin trading volume has achieved a new record in Venezuela, surpassing $1 million per day as locals turn to cryptocurrency for relief from the hyper-inflated bolivar.

Citing data from peer-to-peer (P2P) trading platform LocalBitcoins, Bloomberg reports that bolivar-to-bitcoin trades accounted for $1.006 million in volume on Monday, marking the first time that this trading pair has eclipsed the seven-figure barrier in a 24-hour period.

bitcoin trading
Daily Bolivar to Bitcoin Trading Volume | Source: Bloomberg

The country’s economic woes have been well-documented, and they have been underpinned by runaway inflation that has seen prices rise by nearly 8,900 percent over the past calendar year.

The government no longer issues official inflation figures, so platforms like LocalBitcoins, which allow users to organize trades on their own terms, provide efficient price discovery for the bolivar, whose value rapidly declines on a daily basis.

After obtaining bitcoin, Venezuelans often trade it for USD, which is the primary currency of the country’s black market. Others have taken to keeping most of their liquid assets in bitcoin, trading it for bolivars only when they need to make a purchase.

Venezuela’s government has turned to cryptocurrency as a solution to its economic ills as well, creating a state-backed cryptocurrency called the “petro” that is allegedly backed by barrels of oil from the country’s crude reserves.

The government has said that the petro will become legal tender for all government transactions within the next several months, forcing government agencies to accept payments made with the token, which runs on the NEM blockchain.

President Nicolas Maduro claims that the initial coin offering (ICO) for the petro, which began in January,  has raised more than $5 billion, a figure that would be a record for cryptocurrency token sales. However, most independent analysts — and the country’s opposition party-controlled legislature — dispute its accuracy, and there is currently no evidence that the petro has raised any money at all.

hong kong

Hong Kong authorities have said that while they won’t ban the trading of cryptocurrencies, they will educate people on the risks involved instead.

According to the Financial Services and the Treasury Bureau, the public education campaign will highlight that the crypto market is not regulated, is subjected to hacking, and fluctuates in price, reports the South China Morning Post. The campaign is being run together with the Investor Education Centre, a subsidiary of the Securities and Futures Commission.

It’s expected to be rolled out from March via print, digital, and broadcast media in addition to the Mass Transit Railway (MTR) stations, a major public transport network serving Hong Kong.

Joseph Chan Ho-lim, the Treasury’s undersecretary, said that investors in Hong Kong may not know about the risks surrounding cryptocurrencies and initial coin offerings (ICOs).

Julia Leung Fung-yee, executive director of the intermediaries division of the commission, explained by saying:

When we asked some young people why they bought cryptocurrencies, many of them cared less about the projects mentioned in the [ICOs’] White Paper … they just wanted to make quick money by speculating on the cryptocurrency exchange.

Interestingly, while the volatility of the digital currency market remains a concern to policymakers in Hong Kong, that doesn’t mean they’re about to tell investors what they should and shouldn’t invest in.

These comments come at a time when the cryptocurrency market is experiencing heightened attention from traders and authorities concerned about rising prices. At the end of 2017 bitcoin saw its value soar by nearly 2,000 percent before losing half its price at the start of 2018. Speculation that the sector is in a bubble remains; however, this doesn’t appear to have dampened interest in it. Raising funds through ICOs has also increased, which saw crowdsourced fundraising bringing in between $4 billion and $7 billion.

However, unlike Chinese and South Korean authorities, which are cracking down on cryptocurrencies and trading platforms, Hong Kong’s government has indicated that it doesn’t plan to follow suit anytime soon.

One of the measures that authorities have implemented to protect consumers is that ICO issuers are required to follow existing laws and regulations if the coin they are offering falls within the remit of a security or investment.

Yet, according to Leo Weese, chairman of the Hong Kong Bitcoin Association, this is a topic that needs to be talked about.

“We should know the difference between what makes a good ICO [and what doesn’t] and how we differentiate between scams and legitimate projects.”

Featured image from Shutterstock.

crypto review

According to coinmarketcap the current cryptocurrency market cap sits at around $300 billion, 500 million, with bitcoin making up 53.5% of the total market cap. Overnight Bitcoin crossed the $10k USD barrier.

Below is a summary of the top three currencies on coinmarketcap at time of writing

Bitcoin

Bitcoin, while still in the green, seems to have slowed down its rapid price increase that began early last saturday, lagging behind that price jump was an increase in trading volume that seems to have also subsided this morning, with the price hovering around $9640, with highs of $9823 and lows of $9460. At time of writing the price was $9675.73, with a market cap of $160 billion and trading volume staying stable at around $6 billion all day.

 

High Low
Price $9823.43 $9461.97
Market Cap $164 104 327 522 $158 054 166 175

 

Ethereum

Ethereum is in the green today, 3% against the US dollar and 0.35% against bitcoin. Market cap is at $45 billion and 4 million BTC, with highs of $493.40 and 0.0510 BTC, lows of $468.49 and 0.489 BTC. With the price sitting at $480.10 and 0.04937 BTC at time of writing, with volume sitting around $1.4 billion and 147 thousand BTC. Ethereum’s charts are looking a bit more volatile than the bitcoin chart for the same time frame today.

 

High Low
Price $496.40 | 0.05105570 BTC $468.49 | 0.0497 BTC
Market Cap $49 357 212 129 $44 966 409 692

 

Bitcoin Cash

Bitcoin Cash is 5.9% in the red today against the US dollar and 6.59 in the red against bitcoin, with a market cap of $27.6 billion and 2.8 million BTC. Around 09:30 today it dropped to $1607 and 0.170 BTC, recovering a bit to $1681 and 0.173 BTC, then falling further again. At time of writing the price was at $1613.42 and 0.1658 BTC with a trade volume of $1.5 billion and 161 thousand BTC. The chart is somewhat smooth with a downwards gradient.

 

High Low
Price $1717.61 | 0.178 BTC $1895.66 | 0.164495 BTC
Market Cap $28 889 799 688 $26 848 515 322