In the exciting new world of digital currency, there are two main ways an investor can purchase crypto: either on a digital exchange or via an “over-the-counter” (OTC) trading desk. With the recent surge of interest in digital currencies — not to mention the surge in value — it’s no wonder that more people are wondering about the difference between these two options.
So, what is the difference between a digital exchange and an OTC desk exactly, and which option is right for you when buying digital currencies?
What is a digital exchange?
A digital exchange is any business or platform that acts as a marketplace for traders to buy and sell digital assets — particularly digital currencies. Buyers on a digital exchange agree to swap either their traditional tender (also known as fiat) for digital currencies, in which case the trade is known as “fiat-to-crypto,” or trade one digital currency for another, known as a “crypto-to-crypto” trade.
The exchange itself acts as a mediator between buyer and seller. When the exchange observes that there is an overlap between a seller’s asking price and a buyer’s bidding price, it agrees to make the trade. Each digital exchange is responsible for deciding which cryptocurrencies it offers, as well as the commission rate it charges for each trade.
What is an OTC desk?
In finance, OTC trades are conducted directly between two individual parties, without taking place on an exchange. An OTC desk is a business that specializes in making OTC trades of a particular type of asset, in this case, digital currencies.
As with digital exchanges, OTC trades can be either fiat-to-crypto or crypto-to-crypto, depending on the OTC desk’s offerings. But, unlike digital exchanges where the buyer and seller may be anonymous, OTC trades occur within buyer-seller networks in which both parties conduct business directly with each other.
Digital exchange vs. OTC desk: 4 differences to know
We’ve explained the definitions of “digital exchange” and “OTC desk,” but how do these distinctions play out in practice? Here’s what you need to know about the differences between OTC desks and digital exchanges.
1. Trader privacy
All transactions on a centralized digital exchange are public by default. While the buyer and seller can remain anonymous, the financial details of the trade do not.
OTC transactions can be conducted privately, offering a discreet and personalized service without revealing details of the trade to the larger public. This makes OTC desks a popular choice for institutional investors wanting to place large volumes of transactions, such as hedge funds, family offices, and wealth managers, as well as high-net-worth individuals.
Digital exchanges are subject to price slippage. When making a large trade, the price of the asset will likely change in the time between placing and executing the order. This can be a problem for so-called crypto “whales” that hold a large amount of a particular digital asset and whose activities may create ripple effects and fluctuations in the market as a whole. What’s more, digital exchanges may not have enough of the asset available, or enough buyers willing to purchase the asset, for a large trade to go through.
Steve Walt, GM of Fabriik Markets explains: “A huge benefit of OTC desks is their ability to leverage their balance sheets to offer large amounts of liquidity. For our customers, this typically translates into great all-in execution prices, with no slippage.”
3. Ease of access
Digital exchanges are accessible for practically anyone who signs up for an account and who passes the necessary identity verification process, so ideal for newcomers to digital currency trading.
Meanwhile, OTC desks typically have a higher limit on the size of transactions that they are willing to conduct. This limit may be in the tens of thousands or even hundreds of thousands of dollars.
Digital exchanges may charge both trading fees and fees for wire transfers and withdrawals.
OTC desks charge a single fixed percentage for each trade, but this fee is typically higher than on an exchange, due to the personalized service and attention that traders receive.
When to use a digital exchange and when to use an OTC desk
You should generally use a digital exchange in the following scenarios:
- You’re relatively new to the world of digital currencies.
- You want to have a wide range of currencies and coins available to you.
- You want to minimize the fees and commissions you pay during trading.
Trading digital currency via an OTC desk may be the right choice if:
- You want to place a large transaction and are worried about slippage eating into the transaction’s value.
- You prefer making one-on-one deals or want to keep the details of your transaction private.