One is bound to receive conflicting answers whenever discussing what type of trading is most profitable when it comes to cryptos. This is because of the significant differences, perceived trust and preferential adoption of the various options, besides the fact that the sector has existed for less than a decade.
Nonetheless, with the growth and professionalization of cryptocurrency markets at an unprecedented speed, it becomes important to explore the safest yet most profitable trading solutions for these digital assets. In this article, we will explore the profitability associated with three main types of trading platforms – exchanges, prime brokerage and over-the-counter (OTC) desks.
What is a Digital Exchange?
A Digital Exchange refers to any business or platform that serves as a marketplace for traders to buy and sell digital assets, in this case, cryptocurrencies. On the digital exchange, buyers can swap their traditional tenders or fiat currencies for cryptocurrencies (fiat-to-crypto), or trade one crypto for the other (crypto-to-crypto).
What the exchange does is act as intermediary between the buyer and seller of cryptocurrencies, making the trade whenever there is a perceived overlap between the asking and bidding prices on the two ends. Digital exchanges can choose what type of cryptocurrencies they wish to enlist on their platform, the commission rates they would charge for each trade, and the standardization of the financial products traded.
While there are no standard rules for setting up a cryptocurrency exchange, a reputable exchange keeps data transfer and security at its fore. According to an estimate, there are 504 cryptocurrency exchanges today, but there is no room for precision with exchanges being extremely easy to create. Ranked by volume, some of the biggest exchanges include Binance, Coinbase, FTX, Kucoin, Gate.io, Kraken and Huobi Global.
When to use a Digital Exchange?
If small transactions are what you are planning on, or if you are new to the world of cryptocurrencies, digital exchanges are one of your safest bets for trading. Exchanges put forth a wide range of cryptocurrencies at your disposal, without charging too hefty fees or commissions for the trade.
However, when looking from the perspective of profitability, crypto exchanges might not be the best solution. Digital exchanges are subject to frequent price dips, affected by the volume and size of transactions on the exchange. If you are looking to be a crypto “whale”, holding large amounts and trying to reap in big profits, rest assured that activities and fluctuations on the exchange can create ripple effects in the market as a whole, dooming your chances of profits.
At the same time, not all digital exchanges may have adequate quantity of the asset of choice available. Therefore, if a buyer wishes to purchase large quantities of the asset in the hope of making huge profits, the exchange might not allow them to do that.
Over-the-Counter (OTC) Desks
OTCs step in where digital exchanges fall short – offering sufficient asset quantities or enough liquidity. If a trader wishes to rake in huge profits, that would come from a large transaction alone. While dividing the order between exchanges would be not just time consuming but also capital-inefficient and risky, the participation of professional, regulated intermediaries in the form of OTC companies offers a solution.
What is an OTC Desk for Crypto?
Think of OTC as a direct trade between the two trading parties, without the intermediate exchange playing any role. An OTC desk is a company that helps conduct over-the-counter trades of a particular type of asset, such as cryptocurrencies. Trades can be, just like in the case of exchanges, either fiat-to-crypto or crypto-to-crypto depending on what the OTC desk has to offer.
OTC desk crypto offerings include trade execution and settlement services, where the broker sets up a direct crypto exchange between the two trading parties. The catch is that OTC desks accommodate higher trade values, which is why they are extremely popular among sophisticated investors, institutional investors and “whales”.
Trades are anonymous and opaque and do not affect crypto asset markets overall, meaning there will not be price fluctuations depending on the volume or size of trades. OTC desks are, in fact, the best option when it comes to trade profitability or larger trade quantities in a single transaction.
Are OTC markets safe?
With large trade volumes and transaction sizes, OTC desks shoulder a lot of responsibility in terms of safety and security of transactions, and certainly live up to these expectations. Transactions are more private, and unlike exchange trades where the personal information may be masked by financial information is still accessible, OTC trading offers complete opacity to sensitive transactional data.
But are OTC markets safe? Well, since the trading parties are directly involved with each other and exchange assets directly, there are no exchange risks involved. While these features often lead to higher transaction fees being charged, the benefits of unmatched safety and privacy that you get assumes an even more important role. Depending on the location of the investor and corresponding regulations, KYC and AML requirements, including verification of Proof of Residence and Identity, would be needed, but all such sensitive information remains masked.
At the same time, unlike crypto exchanges that hold custody of your cryptos as soon as you put them on the exchange, you own your crypto assets all the way through using an OTC desk. Crypto exchanges are more prone to hacker attacks and infiltrations due to this very drawback – custodianship of crypto assets of traders. An OTC desk, on the other hand, does not involve exchange intermediaries, with investors alone being responsible for their trades.
Deciding on the Most Profitable Course of Action
Ideally, multiple parameters go into the choice of trading platforms, including transaction size, fees and commission rates, counterparty risks and market stability, nothing beats a time-tested and well-informed approach towards the various options you have before you. At the end of the day, when deciding upon profitability of trading platforms, OTC desks paint a much brighter picture.
While the infrastructure is still shaping up, considering OTC markets are relatively new, OTC desks such as Secure Digital Markets are making things easier for traders through a guided and straightforward trading process. Proudly settling transactions on a daily basis, Secure Digital Markets accepts trades that are $25,000 or larger, though you can get in touch with us if you want to accommodate a smaller transaction.