The bitcoin over-the-counter (OTC) trading market has grown substantially in the past 18 months as more high net worth individuals and institutional investors have been entering the digital asset investment space. In fact, most high volume bitcoin trades take place in the OTC market and not on exchanges.
In this brief guide, you will discover the five biggest mistakes you need to avoid when trading bitcoin in the OTC market.
Trading the full amount:
If you are looking to unload 10,000 BTC, it is best for you to small chunk the transaction into smaller trades over a period of time. Not only will that increase the likelihood of preventing a big move against you once you disclose your intentions, but you will also get a better price when you are selling 1,000 BTC, than when you are selling 10,000 BTC in one go. However, the bitcoin price volatility adds more risks to this strategy.
“Spraying” the market:
Perhaps the worst mistake that you can do if you want to make a large bitcoin trade outside of the exchange ecosystem is to “spray the market”. In other words, you do not want to talk to several brokers about your desire to make a large bitcoin sale or purchase because that will tell other market participants that there is a large buyer or seller in the market, which will most likely prompt an adverse price movement as other market players will react to this information.
What you can do instead is to call up brokers and ask for a two-way price so that you do not give away your position or you only trade with one trusted broker.
Trading during high volatility periods:
In the same way, you should avoid slow, illiquid, low volatility periods, you should also ideally avoid trading in the OTC market during times of extreme volatility. While high volatility often means good liquidity, the high volatility will likely mean poor pricing from your brokers.
When the price of bitcoin is shooting around, brokers will increase the bid/offer price, which will give you a worse price to buy or sell.
Sharing too much information:
Fundamentally, the biggest mistake you can make when trading bitcoin over-the-counter is sharing too much information that can then be used against you. As suggested earlier, not disclosing the full amount you want to trade will ensure that you get a better price and prevents the word from getting out that that there is a large buyer or seller around. The same goes for your future buying or selling intentions or the amount of BTC you hold.
The less information you share with your broker, the better because your broker is not your friend. Your broker’s aim is to make as much money off you – as a client – as possible, regardless of whether you make or lose money on your trades.
Trading during low volume periods:
If the market is slow, i.e., there is little trading activity and limited price movement, it is better to refrain from placing large trades.
In an illiquid market environment, a large trade can easily move the price of bitcoin against you and brokers will charge you higher bid/offer spreads because of the illiquidity.