In the financial world, the OTC platform is no longer a strange concept, especially for venture investors. The OTC platform provides a flexible, diverse, but equally risky trading method. This article will help you better understand the OTC platform and points to note to ensure safety and efficiency when participating in OTC transactions.
Definition of the OTC platform
OTC (Over-The-Counter) is the term used to refer to trading transactions outside the official exchange. In the field of finance and cryptocurrency, OTC platforms allow parties to conduct transactions directly with each other without going through a public exchange intermediary.
In the crypto field, OTC is used to describe private transactions to buy or sell cryptocurrencies that are not conducted on a regular exchange, without a public order book.
OTC platforms help those looking to buy or sell large amounts of cryptocurrency more quickly. If these investors buy large amounts of cryptocurrency on an exchange, their trading will be severely affected by price slippage. Then, OTC trading becomes the optimal choice for individuals with high net income who want to make large transactions. It is estimated that more than half of cryptocurrency transactions take place through the OTC market.
Characteristics of OTC platforms:
- No intermediaries: OTC transactions usually take place directly between two parties without the need for an intermediary like a traditional stock exchange.
- Flexible and diverse: OTC platforms allow the trading of many different types of assets, from stocks of unlisted companies and bonds to contracts, derivatives, and even cryptocurrencies.
- Risk: Because they are not managed by a centralized institution, OTC transactions often lack transparency compared to listed markets. This can increase risks for investors because of the difficulty in obtaining information about the seller and the nature of the assets being traded.
- High customization: OTC contracts and agreements can be extensively customized to suit the specific needs of the trading parties.
OTC platforms play an important role in the global financial system by providing a platform for transactions that are not necessarily subject to the strict regulations of the official market, thereby creating opportunities for smaller businesses to access capital.
How do OTC transactions take place?
Prominent trading products on the OTC platform include unlisted stocks, derivatives, bonds, cryptocurrencies, etc.
- On an individual level, agreements are successfully made with just words, maintained by trust between the buyer and the seller.
- Large OTC trading organizations are more complex as they maintain a network of cryptocurrency investors (buyers) and cryptocurrency sellers. OTC traders will be constantly updated about buyers, sellers, and the best times to make transactions.
- When placing a buy or sell order, the broker will buy cryptocurrency or fiat currency to execute the transaction.
Benefits – risks when trading OTC
Benefits when trading OTC:
- Flexibility in trading conditions: OTC transactions are not limited by the strict rules of traditional exchanges, allowing parties to privately negotiate terms such as price, volume, and settlement time.
- Privacy: OTC platforms usually do not make detailed information public, helping to keep traders’ personal information and investment strategies confidential. You can then arrange the transaction in any method convenient for you – via email, chat, phone call, etc. It is not necessary to register or provide your information to any website or company.
- Suitable for special products: Special or uncommon products may not be available on traditional exchanges but may be traded through OTC.
- High liquidity: OTC trading allows parties to trade large quantities with each other without being affected by sudden price fluctuations in the market.
- Access diverse products and services: OTC markets often offer a wider variety of products and services than what is available on traditional exchanges.
Risks when trading OTC:
- Credit risks: Parties in OTC transactions often have to evaluate each other’s creditworthiness, which can lead to high risks if one party is unable to fulfill its financial obligations.
- Lack of transparency: OTC platforms are often less transparent than transactions on traditional exchanges, and information about prices and trading volumes may not be widely available.
- Difficulties in pricing: Due to the lack of transparency and reference data, the pricing of OTC products is sometimes complicated and inaccurate.
- Lack of management regulations: OTC trading is less regulated than trading on an official exchange, which increases the risk of fraud and other legal issues.
OTC trading offers unique and flexible investment opportunities but also comes with significant risks related to credit, liquidity, and lack of transparency. Investors need to carefully consider these factors to ensure their financial safety.
How to trade on the OTC platform
Below are the general steps for trading Bitcoin and other currencies on OTC platforms:
- Step 1: Find OTC trading locations: At this step, make sure you find a reputable OTC broker. You can search online or ask for referrals from people you trust.
- Step 2: Decide on the terms: Specify the cryptocurrency (if you’re not trading BTC), the amount you want to buy, the time you want the transaction to take place, and the desired price.
- Step 3: Unify the price: The partner will bid on his own and you can negotiate. Once both have agreed on a specific price and value, the transaction will be executed. During this phase, OTC and related parties shall perform KYC verification – identity verification. Once completed, you and your partner transfer assets – ending the transaction.
Tips and strategies for effective trading
- Understand your partners: Please check the partner’s information and evaluate the partner’s credit before trading to ensure safety.
- Negotiate carefully: It is necessary to clearly negotiate all details related to the transaction to ensure the best possible conditions.
- Use analytical tools: Investors should take advantage of analytical tools to make trading decisions based on clear data instead of investing based on emotions.
Besides, you can diversify your investment portfolio to reduce risks and research the market thoroughly to grasp the best trends and opportunities. It is important to remember that each transaction has a certain risk ratio. The higher the risk, the higher the profit, so be very careful when participating in trading on the OTC platform.
Are OTC platforms safe?
The safety of OTC platforms depends on many factors:
- Trading partners: OTC transactions do not go through a public exchange, so trading partners may not be thoroughly controlled or verified, leading to higher risks of fraud or non-compliance with commitments.
- Regulation and supervision: Because there is no central supervisory authority, the level of legal protection for the parties in the transaction may be lower than in traditional transactions.
- Privacy: Some OTC platforms do not have strong security measures compared to official exchanges, which increases the risk of hacking or theft of personal information and assets.
- Transparency: OTC transactions are often less transparent than transactions on public exchanges, which makes it difficult for users to get complete information about prices and asset origins.
Thus, the OTC platform will be a safe place to trade if you take the time to learn about the operating principles of the platform, find out about trading partner information, research the products you want to invest in, etc., then you will minimize risks as well as increase your profit rate.
Above is all the important information about the OTC platform that investors need to know. The OTC platform offers diverse investment opportunities with many different financial products. However, due to its less supervision and lack of transparency, investors need to be careful and have solid knowledge when participating in transactions on this platform.
