The over-the-counter (OTC) market for bitcoin is bigger than the exchange market. Exchanges set the price but the majority of big ticket trades usually don’t happen there. In 2018, bitcoin OTC trading volumes have become even bigger.

According to research report by Tabb Group, the bitcoin over-the-counter (OTC) market was approximately three times larger than the exchange market with evaluation of OTC market processing $12 billion worth of bitcoin trades daily in August last year.

While in the current bear market, buyers outnumbered sellers, as reported by major OTC desk Cumberland on Jan.8, the OTC buy/sell ratio has broken the relative balance and increased approximately 60% towards counterparties buying.

Institutional investors enter with large volume OTC trades

The most mysterious OTC transactions are those big ticket trades. The commission of such a big trade could earn a broker hundreds of thousand yuan, much lucrative than real estate brokerages.

According to Dow Jones market theory, when the market falls, a myriad of hedge funds, high net worth individuals and institutional investors known as “whales” will quietly enter to be prepared for the next rally.

“Institutional investors, whose big trades lack liquidity on exchanges, need a stable price and lots of cryptocurrency.” An OTC broker named Max said.

Max has been in the OTC trading business for almost three years. Served as the seller’s agent, he often helps facilitate big OTC trades of thousands of bitcoins; these days, he’s doing business with trade size of tens of thousands of bitcoins.

Large consortium, funds and trusts would hedge risks through crypto OTC trading, says Max. “They may have hundreds of billions of dollars in fund, they will certainly hedge this capital. Bitcoin is a very, very small channel for them to hedge their money.”

Companies like DRW Cumberland, Circle Trade, Genesis Trading, Jump and OSL have all established OTC desk for institutional investors and handle a massive amount of OTC crypto trading daily.

“The market depth of many domestic exchanges is not deep enough. For example, if you buy hundreds or even dozens of bitcoin, the spot price of BTC on exchanges may rise 1.2 to 1.4 percent. So if big buyers buy bitcoin on exchanges, they will have to pay about 10 to 20 percent more for a deal.” Max explains why big buyers are more willing to trade in the over-the-counter market.

Who else is trading over-the-counter?

Aside from lowering transaction fees, asset transfer and money laundering also fuel the flourishing OTC trades.

“Those superrich, export traders, and top-level officials also buy large amount of stable coins in the OTC market, in an effort to move their asset out of the country.” Said a senior broker in this business surnamed Wang. “These men prefer to trade stablecoins like USDT as it is 1:1 pegged to U.S. dollar, especially those who do real estate business.”

A foreign exchange quota of $50,000 a year for Chinese nationals has been the roadblock for these clients’ capital to go offshore, and cryptocurrency provides a perfect solution for them.

Wang is reluctant to do big ticket deals, arguing that the process is too complicated and involves many agents and intermediaries.

“It’s not an easy job as it looks. It’s quite common that middlemen screw up deals because there’s too much mistrust and too many conflicts of interest in the process. My clients are almost from traditional financial sector, they don’t quite believe people from the crypto sphere.”

Buyers are reluctant to provide KYC proofs and sellers are unwilling to pay the test coins, the mistrust between the two parties is the major roadblock.

“That explains why a verified KYC of an OTC trade worth 100 million yuan (roughly $15 million) would be sold as high as 100k yuan ($15,000).”

VIP rooms at Hong Kong HSBC and Wells Fargo are most-preferred venues for large OTC trades in cryptocurrency, but they only provide sites for transaction, not any guarantee for neither parties like some foreign trust institutions and banks.

As according to regulations in the country, financial institutions are not allowed to get involved in any business related to cryptocurrency.