OTC Trade Data Shows Institutional Investors Now Dominate Bitcoin Markets With High Volume Trades

  • Crypto market volume now dominated by over-the-counter trading as miners and hedge funds prefer OTC contracts to exchange trading
  • Crypto adoption is now being championed by institutional investors not high-net-worth individuals

Many in the crypto industry believe that the ‘golden fleece’ of mass adoption will be heralded by the entry of large institutional investors into the market. According to Bloomberg many institutional investors are already highly involved in the $220 billion cryptocurrency market - more than most of us may realise.

OTC Trading Takes Off

According to Bobby Cho, global head of trading at Cumberland, which is the cryptocurrency unit of DRW Holdings LLC handling over-the-counter (OTC) purchases, the replacement of high-net-worth individuals with hedge funds as the biggest OTC buyers of crypto in deals worth more than $100,000 is a sign that the asset class may have started to achieve maturation in the eyes of the market.

Speaking to Bloomberg he said:

What that’s showing you is the professionalization that’s happening across the board in this space. The Wild West days of crypto are really turning the corner.

Bobby Cho

Bloomberg reports that in April, daily OTC trades varied anywhere between $250 million and $30 billion, while exchanges only handled about $15 billion daily in that time by contrast. Corroborating this, Circle Financial CEO Jeremy Allaire confirmed that his company is seeing a triple-digit increase in OTC volumes.

By contrast, according to data from CryptoCompare, exchange trade volumes are down 80 percent from their peaks at the same time as the increasing popularity of OTC. According to Cho, this may well be a feature and not a bug within the sustained crypto market downturn. He stated:

One of the biggest criticisms of crypto by institutional investors has been the volatility. Over the last four to six months, the market has been trading in a very tight range, and that’s seems to be corresponding with traditional financial institutions becoming more comfortable diving into the space.

Bobby Cho

Advantages of OTC

A major reason behind the popularity of OTC transactions over exchange trades is the relatively lower risk involved. OTC transaction prices can be fixed in advance, which removes the investors’ exposure to price movements just before or during the transaction.

Another major reason is that there is an increasing number of institutional investors entering the market, leading to a shortage of liquidty on exchanges.

Commenting on this phenomenon, Sam Doctor, managing director and head of data science research at Fundstrat Global Advisers said:

At this point in time, because more and more institutions are beginning to enter the market, there’s more of an imbalance. That’s why brokerage firms are springing up to help institutional buyers find inventory

Sam Doctor

Perhaps most significantly of all, miners selling cryptoassets to investors using OTC transactions are able to offer so-called “virgin coins” - cryptoassets that have never been used before. These coins are particularly desirable to investors - sometimes attracting a premium of up to 20 percent - because it is easier to prove that they have not been used to facilitate crime or money laundering before, which reduces the risk of reputational damage to large corporate investors.

Error in Time-Locked Bitcoin Contracts Allows for Miner 'Fee-Sniping'

Michael LaVere
  • Crypto researcher 0xb10c discovered an error in bitcoin "time-locked" transactions that could be used as an attack vector.
  • Miners can take advantage of the program to carry out "fee-sniping" and steal funds from one another. 

Users have discovered an error in bitcoin “timelocked” contracts that could potentially allow miners to steal BTC from one another. 

Anonymous crypto engineer 0xb10c reported discovering more than one million “time-locked” transactions made between September 2019 and March 2020. In a post, 0xb10c detailed how these special bitcoin transactions were not being accurately enforced by the network. 

As opposed to normal transactions, time-locked transactions prevent recipient bitcoin from being accessed after sending. Users must wait for a specific number of blocks to be added to the network in ten-minute intervals before gaining control of their bitcoin. 

0xb10c claimed the errant time-locked transactions provided an attack vector for miners to steal transaction fees  from one another via “fee-sniping.” According to the engineer, the backlog of time-locked transactions were being purposefully designed for a “potentially disruptive mining strategy” involving the theft of miner fees. 

In an interview with CoinDesk, 0xb10c said time-locked transactions represented a “low-priority” problem at present that could eventually balloon to involve the wider network. He explained that fee-sniping would become more lucrative in a few years as the majority of miner income shifts towards transaction fees. 

He continued, 

A fix for this has been released in early 2020. However, it will take a while before all instances of the currently deployed software are upgraded.

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