The digital currency world continues to advance, with OTC crypto derivatives becoming a crucial market segment, especially for institutional investors. These derivatives, traded over the counter, provide an approach to crypto investment that is different from traditional exchange trading. This article explains the essence of crypto OTC derivatives and their advantages for institutional clients.
What Are Crypto Derivatives Traded OTC?
OTC desks facilitate substantial crypto transactions away from the public eye, ensuring that these large trades don’t affect overall market prices. At first glance, this function might seem similar to the role of market makers. Yet, there’s a clear distinction between the two.
Who is market maker in crypto? A market maker is an entity that provides liquidity to the market by always being ready to buy or sell at posted prices. They operate on large crypto exchanges. An example is the WhiteBIT market maker program.
While OTC traders operate “invisibly” to prevent market disruption, market makers actively set prices and add liquidity to the public market.
Crypto OTC derivatives bridge the innovative yet complex world of cryptocurrencies and the more familiar traditional financial instruments for institutional investors. Due to the novel blockchain technology underlying spot crypto trading, these institutions are often cautious. So, they look for ways to engage with digital assets without the immediate need to rethink their existing systems. This approach is understandable, as it’s important to consider the potential risks and benefits before diving into something new.
Understanding the unique characteristics of cryptocurrencies and blockchain technology takes time and careful consideration. Institutions are thus inclined to explore this new asset class without committing extensive resources to technology integration initially. Here, crypto OTC derivatives come into play, offering a strategic entry point to cryptocurrencies with the traditional financial market’s mechanisms for customization and risk management.
Benefits for Institutional Clients
For institutional investors, crypto OTC derivatives are attractive because of their numerous benefits:
- Privacy. This aspect is particularly appealing for institutional investors in crypto, who may wish to avoid influencing market prices with their sizable trades.
- Tailored investment strategies. OTC derivatives allow for the customization of investment approaches, specifically catering to each investor’s risk tolerance, financial goals, and strategic needs.
- Institutional access to crypto without direct buying. Institutions can gain exposure to the crypto market without holding the underlying assets. It reduces the complexity and security concerns associated with direct asset ownership.
- Avoidance of slippage. By negotiating prices directly, investors can avoid the slippage that often occurs in public exchange trading due to large orders moving the market.
Crypto OTC derivatives represent a significant advancement in the crypto investment landscape, offering institutional investors flexible and strategic investment options.
