What is Crypto OTC Trading and How Does It Work?

If you've ever tried to buy or sell a large amount of cryptocurrency, you probably noticed how inefficient traditional crypto exchanges can be. Price slippage, limited liquidity, and visibility of trades are but a few challenges that come to mind. That's where over-the-counter (OTC) trading comes in.

Whether you're an institutional investor, a high-net-worth individual, a business, or even a simple trader, OTC trading can offer a discreet, flexible, and more controlled trading experience than what you'll get with exchange-based trading. But what exactly is it? And how does it work?

In this guide, we'll explore what OTC trading is, how it works, its benefits, risks, and how you can get started.

What is Crypto OTC Trading?

Crypto OTC trading refers to buying and selling cryptocurrencies directly between parties, rather than using conventional exchange platforms and public order books. OTC transactions are typically facilitated by OTC desks, brokers, or other trusted peer-to-peer (P2P) platforms.

So why would anyone use OTC platforms instead of regular exchanges? Well, the appeal of OTC trading is that it allows high-volume traders to execute transactions at agreed-upon prices, helping to minimize the risk of price slippage.

And unlike centralized exchanges (CEXs), where large-volume trades can significantly impact the market price, over-the-counter trading provides a more controlled environment for executing trades without causing major price and market volatility.

Depending on the host platform, OTC trading can also offer flexible settlement options. So instead of being stuck with one way to trade, buyers and sellers can choose their preferred method of transaction finalization, like bank transfers, stablecoin payments, or direct token swaps.

How Does Crypto OTC Trading Work?

Crypto OTC trading operates differently from traditional exchanges. Here's an overview of how the process works.

The OTC Trading Process

OTC trading follows a structured process to ensure smooth transactions and fair pricing for both buying and selling crypto.

Step 1: Initiating a Large Crypto Trade Through an OTC Desk

The first move for traders looking to buy or sell large amounts of digital assets is to approach an OTC desk or broker. These desks have extensive networks of buyers and sellers with access to vast amounts of liquidity.

Optional: KYC and Compliance Checks

Before the trade, both parties typically undergo Know Your Customer (KYC) and Anti-Money Laundering (AML) checks. Regulated platforms will implement these in the interest of legal and regulatory compliance, and to help prevent fraud and illicit activity.

Step 2: Negotiation and Price Agreement

Unlike exchanges where prices fluctuate based on market supply and demand, OTC trades involve direct negotiations between buyers and sellers. Traders can set a price for their order, or negotiate so that the trade suits both parties, with the aim of reducing slippage and minimized market impact. In some cases, OTC traders may use advanced mechanisms like smart contracts for automated and more secure transactions.

Step 3: Transaction Settlement

Once a price is agreed upon, the transaction is settled either instantly or within a predefined period, depending on the payment and custody solutions used. Settlement can be done in fiat or crypto, depending on trader preferences.

Optional: Post-Trade Reporting and Support

After settlement, the OTC desk may provide post-trade documentation and reporting for record-keeping or audit purposes. Ongoing support could also be available to address any issues or assist with future trades, offering a more concierge trading experience.

Optional: Escrow

In the name of transparency and security, some crypto OTC desks use escrow services. These services hold the assets in a secure environment until both parties have met the agreed-upon conditions. Some OTC platforms may also utilize third-party custodians to safeguard funds during the trading process.

Different Types of OTC Trading

Crypto OTC trading comes in a few different forms, each with its own approach and benefits. Here's a closer look at the main types and where you can access them.

Broker-Facilitated OTC Trading

Brokers act as intermediaries in over the counter swaps. They connect buyers and sellers to execute high-value trades efficiently, using their networks to offer the best prices and quick settlements. Broker OTC platforms may occasionally also offer customized services and market insights to help clients make informed trading decisions.

Popular Broker-Facilitated OTC Trading Platforms

• Coinbase Prime
• Kraken OTC
• Binance OTC
• Bitstamp

Peer-to-Peer (P2P) OTC Trading

P2P OTC crypto trading allows traders to negotiate directly without a middleman, often using escrow services to compensate for security vulnerabilities that accompany this sort of negotiation. P2P trading is particularly popular among traders who prioritize privacy, as well as greater flexibility in payment methods and trading terms.

Popular P2P Crypto OTC Trading Platforms

• OKX
• Paxful
• Binance P2P
• KuCoin

Role of OTC Desks and Brokers

Both OTC desks and brokers play a crucial role in crypto trade facilitation. Let's break down how they operate and the services they offer.

How OTC desks work

OTC desks are specialized trading platforms that facilitate large-volume transactions without using public order books. They provide deep liquidity, tailored services, and flexible settlement options. Many desks cater specifically to institutional investors and high-net-worth individuals (HNWIs) who require confidentiality and efficiency.

How brokers facilitate trades

Brokers help clients navigate the complexities of large trades by sourcing liquidity from multiple providers, securing favorable pricing, and ensuring smooth settlement processes. They often provide additional services such as market analysis, compliance support, and risk management strategies.

Order Types and Customization

OTC trading offers various order types to meet traders' specific needs:

• Block Trades: Large single transactions executed at a pre-negotiated price.
• Limit Orders: Orders placed at a specific price, only executed if the market reaches that price.
• Private Deals: Highly customized agreements between counterparties for discreet and flexible trading.
• TWAP Orders (Time-Weighted Average Price): Orders executed over a period of time to reduce price impact.
• VWAP Orders (Volume-Weighted Average Price): Orders that execute based on market volume to achieve better average pricing.

OTC Trading vs. Regular Exchange Trading

OTC and regular exchange-based trading work differently. The following table offers a quick glimpse to help you decide which suits you best.

Advantages of OTC Crypto Trading

Over-the-counter trading offers several advantages for crypto traders—let’s dive into why it’s becoming a popular choice for those seeking privacy and efficiency.

Privacy and Anonymity

Unlike public exchanges, OTC trades occur off the books, keeping trade details confidential. This is particularly important for institutions and high-profile investors who do not want their trading activity to be visible, or to cause market volatility.

Price Protection and Reduced Slippage

Over-the-counter trading helps prevent larger trades from drastically impacting market prices, while also protecting traders from high slippage during execution. Such stability is desirable for high-volume traders to be able to execute orders without experiencing price volatility and after the exchange.

Access to Liquidity

OTC desks that provide deep liquidity pools serve a role to provide seamless execution of high-volume trades. Sufficient liquidity is necessary for all trades of any kind, but it is particularly useful for institutional investors to enter and exit positions without a major market impact.

Customized Services

Some brokers and OTC desks offer dedicated assistance and tailored services for high net worth traders and institutions. Personalized levels of service are especially beneficial for traders who require strategic execution and custom settlement options, though it may come with an added fee.

Risks and Challenges in Crypto OTC Trading

While OTC trading offers many benefits, it also comes with its own set of risks. Here are some of the numerous challenges that traders should be aware of.

Counterparty Risk

In any OTC exchange, there is always the possibility that the other party defaults or reneges on the trade. To mitigate this risk, traders should only utilize regulated OTC desks and ones that use escrow services.

Regulatory Compliance

OTC trading is subject to evolving regulatory considerations, requiring traders to complete certain steps to ensure compliance. Different jurisdictions have varying requirements for KYC (Know Your Customer) and AML (Anti-Money Laundering) procedures, and users should be prepared to undergo steps like proof of ID, liveness checks, risk scoring, and enhanced due diligence (EDD).

Fraud and Scams

OTC trading can attract bad actors looking to exploit the lack of public oversight. Scammers may pose as legitimate buyers or sellers in an attempt to deceive traders into sending funds or assets without fulfilling their end of the deal. This is why traders should always conduct thorough due diligence, verify the identity and reputation of counterparties, and use trusted escrow services or regulated platforms.

To learn more about how to protect your crypto, see our article, How to spot and avoid crypto scams.

Market Manipulation

Malicious actors can use crypto OTC trading platforms to manipulate the price of a cryptocurrency. For instance, they may sell tokens OTC and then re-inject liquidity into the cryptocurrency market through traditional crypto exchanges. Such an act would theoretically keep the price of the token artificially inflated, while insiders are essentially dumping coins via private trades on the side.

Limited Price Transparency

Since OTC trades are private, price discovery can be challenging compared to public exchanges. However, legitimate brokers should be able to provide market insights to help traders make informed decisions and agree upon price.

FAQs about OTC Crypto Trading

Got questions about OTC trading? Here are some of the most common ones to help you better understand how it all works.

Who typically uses OTC crypto trading?

OTC trading is mainly used by institutional investors, high-net-worth individuals, hedge funds, and high-volume traders (crypto whales) who need to move large amounts of digital assets without causing market fluctuations. It’s also popular among traders seeking privacy, customized services, or better access to liquidity.

Is OTC trading legal?

Yes, OTC crypto trading is legal in most jurisdictions, provided it complies with local regulations. Reputable crypto OTC desks follow strict KYC (Know Your Customer) and AML (Anti-Money Laundering) procedures to comply with legal and transparent operations.

How do I choose the best OTC trading platform?

When choosing an OTC platform, consider factors like security, reputation, regulatory compliance, supported assets, fees, liquidity access, and quality of customer support. Look for platforms that offer strong KYC/AML procedures, clear fee structures, and have a track record of legitimate and successful trades.

How to Get Started with OTC Crypto Trading

If all this sounds too complex, don't worry—there are some easier alternatives. While OTC trading is great for high-volume transactions, smaller investors and everyday users often prefer simpler options like MoonPay.

With MoonPay, you can buy crypto instantly using fiat, without the hassle of complex negotiations or large trade minimums. It’s easy to use, fully regulated, and supports a wide variety of crypto assets and payment methods—perfect for anyone looking for a quick and reliable way to get started with cryptocurrency.