Over-the-counter is defined as a transaction made outside of an exchange, often peer-to-peer through private trades.
Over-the-counter (OTC), also called off-exchange trading, is a transaction conducted outside of a traditional trading platform through the help of intermediaries. Often, OTC trading is preferred by private traders as it usually involves huge transactions and offers more flexibility and better pricing than exchanges can offer. Equities and cryptocurrency derivatives are among financial instruments that are tradable over the counter.
OTC is not limited to deep-pocketed private traders though, and over-the-counting trading is also prominent in jurisdictions where, for example, cryptocurrency exchanges are disallowed. Another reason to use an OTC avenue instead of a normal exchange is when the amount involved is so significant that it may affect the markets and price of the crypto asset involved.
Furthermore, over-the-counter is ideal where the instruments traded aren’t listed on a conventional exchange. Therefore, prices and quantities involved in OTC trades aren’t automatically accessible by the public.
Note that over-the-counter trades only involve two parties. However, the traders don’t physically meet. Instead, they use OTC-specific networks to meet and trade. Over-the-counter trading is a key component in the global financial sector since it boosts liquidity and enhances trading flexibility.
Despite its advantages, OTC trading has higher counterparty risks compared to formal exchanges. The trading option may suffer from low liquidity when high trading amounts are involved. Additionally, lack of transparency on prices lead to uneven trading grounds.
Information sharing on OTC networks goes through electronic listing services such as the OTC Bulletin Board (OTCBB). Examples of OTC networks dealing in Bitcoin and other cryptocurrencies include Coinbase Prime, Kraken OTC Desk, BitBay OTC and Bitpanda Plus.