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Comparing OTC and Exchange Crypto Trading

by sophiajames
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Over the counter (OTC) which means transactions conducted outside of exchanges is commonly utilized for reasons such as facilitating transactions and ensuring enhanced privacy and confidentiality.

OTC trading proves advantageous for institutions and high net worth individuals who seek execution of their transactions. However it should not be seen as a replacement for exchanges nor is it suitable for low volume trading. Moreover OTC trading demands consideration when selecting and evaluating counterparties.

Benefits of OTC Trading

Stricter KYC approach. OTC platforms exercise caution in identifying their counterparties.

Fixed fees. In OTC trading fees are. Negotiated beforehand. Typically they adhere to a fixed rate ranging from 0.35% to 0.4%.

Enhanced confidentiality compared to exchanges. Transaction data on exchanges is publicly accessible potentially leading to market manipulation and price volatility.

OTC desks offer the parties involved the opportunity to transact discreetly without alerting the market. This proves valuable for individuals or organizations, with wealth who prefer maintaining a low profile. Additionally OTC desks provide flexibility in terms of trading options and volumes.

In contrast, to exchanges where traders are limited to the currencies and volumes OTC trading provides more flexibility. It allows traders to customize their orders based on criteria and access pools of liquidity. This enables them to execute trades that may not be possible on exchanges and adjust their strategies according to market conditions.

Prices on OTC platforms are fixed before the transaction, so the risk of slippage on them is minimized.

Drawbacks of OTC Trading:

With less oversight and legal protections – there is an increased risk of default by one party to a transaction. 

Settlement risk – the risk of non-execution of a trade or deferred execution of a trade. This may be due to difficulties in selling your positions in case of sharp changes in the market or default of the counterparty.

OTC trading should not be considered suitable for trading small volumes of cryptocurrencies.

Key Differences between OTC and Exchange Trading in Cryptocurrency

I. Trading Fees

On exchanges, trading fees depend on a trader’s order volume and typically range from 0.1% to 1.0% per trade.

Conversely, OTC desks offer fixed rate ranging from 0.35% to 0.4% for each trade – a feature, for investors involved in transactions.

This pricing approach brings advantages as it tackles the problem of price slippage commonly encountered on exchanges. Price slippage refers to the situation where the price of a trade changes, between the moment it is ordered and when it is executed.

II. Slippage and Liquidity

OTC desks rely on market makers, often known as OTC brokers, who connect buyers and sellers directly. This eliminates concerns about market depth order book depth and other similar issues that can arise on an exchange. However, exchanges rely on order flow for liquidity, which can vary based on factors like time and market conditions.

Investors should not overlook the importance of slippage. On exchanges, there is a possibility of experiencing slippage when the price of an asset changes between placing an order and its execution. In contrast, OTC desks provide fixed prices, per transaction to address this concern effectively.

III. Custody

When it comes to handling amounts of cryptocurrency, ensuring custody becomes a factor. Protecting ownership is vital for investors. While exchanges may provide custody options there is always a concern about the risk of asset loss due to hacking incidents. That’s where OTC desks excel; On OTC desks, ownership is transferred only when the exchange takes place, which can occur immediately. Without an intermediary, investors bear complete responsibility for each trade. While this can be advantageous, investors need to ensure they select a reliable and trustworthy broker.

IV. KYC Process

The KYC (Know Your Customer) process plays a role in verifying a trader’s identity minimizing the potential for activities like money laundering. While retail traders usually need to provide KYC documents when dealing with exchanges, OTC desks require information from corporate investors due to their involvement in higher-volume transactions.

The KYC process on OTC desks is more thorough. May take longer compared to exchanges because these desks handle trade volumes.


Choosing between OTC desks and exchanges wisely is pivotal, in achieving your investment objectives. Exchanges provide liquidity and clear pricing although they do have some disadvantages, like slippage custody concerns and strict KYC processes. As a cryptocurrency investor, it is crucial to assess your investment objectives and trading requirements before choosing between OTC desks and exchanges.

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