Bitcoin trading happens in many ways. Most people use regular exchanges like Millionero, but there’s another world of trading that not everyone knows about: OTC (Over-the-Counter) trading. It works differently from centralized exchanges (CEX) or decentralized exchanges (DEX). Let’s dive into what OTC trading is, how it works, and why it matters for Bitcoin.
What is OTC Bitcoin Trading?
OTC stands for “Over-the-Counter.” It means buying and selling Bitcoin directly between two parties without using a public exchange. Instead of placing an order on a platform like Millionero, a buyer and a seller agree on a price privately. These deals often happen through specialized OTC desks or private brokers.
The difference can be summarized like this:
- CEX/DEX trading: Everyone sees the prices and trades on a public platform.
- OTC trading: The trade happens quietly, away from public view.
How Does OTC Trading Work?
OTC trading is primarily used by institutions or high-net-worth individuals who want to buy or sell large amounts of Bitcoin without causing significant price movements in the public market.
For example, a company might want to buy 10,000 Bitcoin. If they placed that order on a regular exchange, the sheer size of the trade would drive up the price due to supply shock. To avoid this, they contact an OTC desk.
Here’s how a typical OTC trade works:
- A buyer contacts an OTC desk and specifies the amount of Bitcoin they want to purchase.
- The OTC desk finds a seller who can fulfill the order.
- They agree on a price privately, without posting the trade on any public exchange.
This private negotiation helps prevent large orders from impacting the market price.
Two Circles of Bitcoin Liquidity
Bitcoin liquidity exists in two distinct circles:
1. The Public Circle
This is the open market where retail traders buy and sell Bitcoin on platforms like Millionero or DEX like Uniswap. Prices are visible to everyone, and the market operates with transparency. It’s a competitive environment where traders aim to get the best possible deals.
2. The Private Circle
This is the world of OTC trading. Institutions and wealthy individuals conduct large Bitcoin transactions through OTC desks. These trades happen outside the public exchanges, in a private market with its own supply and demand dynamics.
These two circles generally operate separately. However, the interaction between them has a significant impact on Bitcoin’s price in the long term.
The Key Link: Miners
Miners play a crucial role in connecting the public and private liquidity circles. They are the source of newly minted Bitcoin and a key supplier for OTC desks.
Here’s how it works:
- Miners sell newly minted Bitcoin to OTC desks.
- OTC desks sell that Bitcoin to institutions.
- When OTC desks need more Bitcoin, they go back to miners or the public market.
Miners are aware that institutions are willing to pay a premium for large amounts of Bitcoin, so they often charge higher prices. This creates upward pressure on Bitcoin’s price over time. As OTC desks deplete their supply, they must pay more to miners, gradually affecting public market prices as well.
Why Don’t OTC Trades Affect Public Prices Immediately?
You might wonder why Bitcoin’s price doesn’t shoot up immediately when institutions buy large amounts through OTC desks. The answer lies in how these trades are executed.
OTC desks and institutional buyers use strategies to avoid market disruptions. One common method is TWAP (Time-Weighted Average Price). Instead of making a large purchase at once, they buy small amounts over time to minimize the impact on public prices.
Michael Saylor, the co-founder of MicroStrategy, explained this approach in an interview. His company uses exchanges like Coinbase and follows a TWAP strategy to accumulate Bitcoin without causing sudden price spikes.
Source | Michael.com
What Happens When OTC Desks Run Out of Bitcoin?
Bitcoin’s fixed supply is a crucial factor in understanding how OTC trading affects the market. There will only ever be 21 million Bitcoin, which makes it different from traditional assets like stocks or bonds.
When OTC desks run out of Bitcoin, they need to replenish their supply by buying from miners or the public market. As the supply decreases, they are forced to pay higher prices.
This creates a ripple effect:
- Miners charge more.
- OTC desks raise their prices.
- Institutions must pay more.
- Public market prices rise as a result.
In the long term, this competition for limited Bitcoin supply between institutions and retail traders could drive prices significantly higher.
The Arbitrage Effect
Even though OTC trades happen privately, they eventually impact public markets through arbitrage.
Arbitrage occurs when there are price differences between markets. For example:
- If Bitcoin is cheaper on an OTC desk than on Millionero, traders will buy it from the OTC desk and sell it on Millionero.
This arbitrage process causes prices across different markets to converge over time. In the long run, all Bitcoin markets are connected, and price differences are minimized.
Final Thoughts
OTC trading is an essential part of the Bitcoin ecosystem. It allows institutions to make large transactions without disrupting the market, but it also creates a separate liquidity circle with its own dynamics.
Understanding the interaction between the public and private liquidity circles is key to grasping Bitcoin’s long-term price movements. As institutions continue to accumulate Bitcoin and the supply remains limited, the pressure on public prices will increase.
This article includes both facts and opinions from our writer. It is not financial advice. Always DYOR before making any financial decisions. For more insights, check out our blog at blog.millionero.com. When you’re ready to trade, visit Millionero.com to explore spot and perpetual trading.