- August 7, 2024
- Category: Crypto
For those who still do not understand what the OTC market is and what principles of activity it has, we recommend reading the article further.
Exchange Trading
Before diving deeper into what the OTC market is, let’s discuss the base, namely standard trading.
Where does it take place? On special platforms called exchanges.
What are these platforms for? To bring participants together, to provide them with a reliable space for interaction.
How do they make money? Very simply – they take a commission for their services.
The peculiarity of the work of such a platform is that all participants must meet its requirements, as well as comply with the rules.
What does it mean that OTC markets are decentralized and is it true?
Such a process as OTC market trading can be considered decentralized. Participants agree on all details of the transaction directly with each other. However, the market has a network of dealers or brokers who are intermediaries, provide a certain level of guarantees for users, and give sellers and buyers a platform where they can negotiate.
OTC crypto is considered to be a very promising area of interest to crypto investors. This is confirmed by the fact that even during a significant decline in the exchange rate of major cryptocurrencies, major exchanges, such as Binance, Coinbase and Circle, created their own OTC desks, i.e. their own platforms where trades were conducted outside the exchange.
Types of OTC markets: what are they?
There are several types of markets that can be considered that are not on an exchange. They are categorized into tiers and companies are categorized according to different factors, in particular the availability of information about them and reports.
OTCQX
This is the most stringent market of the highest level. Only 4 percent of assets rotate in it, as to get here you have to pass a strict screening process, submit financial statements, undergo regular inspections and supervision, etc.
OTCQB
It is a second-tier market. Also, when they talk about venture capital markets, they mean venture capital markets. Compared to the previous type, there are not such strict requirements to the financial experience of the company. The best OTC stock brokers are located here.
Pink Market
This market is mixed, with both legitimate and shell companies, as well as penny stocks. This includes companies that provide incomplete or no information about their finances.
Grey Market
Anyone can get in here, so it is more risky for an investor to make a deal here. There is no regulation and control in such a market.
Why should investors pay attention?
Crypto OTC interests merchants for a reason. It offers a lot of advantages that they can take advantage of. Let’s take a closer look at them.
Flexibility
It goes without saying that when there is no intermediary setting its own rules, bidding becomes more flexible. You can negotiate your own prices and the timing of the transaction, taking into account your own needs, so that you are adapted to you, not the other way round.
Cost-effective
Naturally, trading OTC is more favorable economically. The absence of an intermediary ensures the absence of various costs, such as commissions.
Confidentiality
If an investor does not want their identity to be revealed, they can use this trading model. There are no strict personalisation requirements like on conventional exchanges, so you can maintain your anonymity.
More Securities and Wider Reach
To get into the stock exchange, you have to go through certain requirements. At the same time, even reliable assets, in which it would be profitable to invest, cannot always pass the verification. In such a case, OTC stock trading becomes the only way out, and investors get a wider choice of assets.
And what about the risks?
It is important to realize that any cryptocurrency transaction has its own risks and cannot be 100% safe. But, since there is no intermediary at all in this transaction format, the risks increase, and this manifests itself in the factors we will discuss below.
Regulation
As such, there is no financial regulation of such transactions. Therefore, off-exchange trading platforms may include companies that do not meet the necessary reliability requirements. All this increases the risk for the investor.
Counterparty
How to trade OTC stocks is not monitored by any higher authority. This process takes place independently and does not imply any guarantees. It may happen that one of the parties changes its mind to fulfil its obligations, and it will get nothing for it. While the other party will suffer significantly from this.
No Records
Any records on the financial affairs of companies in OTC markets are not required, especially if it is a lower level market. Therefore, an investor is not always able to obtain full information about the company itself or its assets, which naturally increases risks. Best brokers for OTC stocks, of course, place such information about themselves, but not all of them.
Liquidity
Liquidity, i.e. the indicator that shows how quickly an asset can be converted into money, is usually low in this type of interaction. This is because trading frequency is lower and it is difficult to buy or sell large volumes of assets.
Summary
There can be many reasons to trade on a crypto OTC trading platform. It is an ideal option for when there is a need to sell large volumes of coins. This trading format will be of particular interest to successful miners and large crypto investors.
This kind of activity gives more flexibility to all traders, as they can independently set prices, timing of the transaction, etc. And even despite the risks associated with such trading, it is still relevant and remains a promising direction for those involved in trading.