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After the SEC’s approval, the bitcoin ETF has attracted nearly $11 billion in just four days of trading, highlighting a renewed excitement for digital assets. It can be seen as a green light, a potential relief for institutions after a challenging 2023 with the post-FTX landscape and ongoing regulatory difficulties.

According to CoinMarketCap, daily bitcoin trading on major exchanges has averaged around $22 billion over the past 60 days, with some days experiencing spikes up to approximately $40 billion. 

Additionally, open interest, which refers to the amount invested in bitcoin futures, has steadily increased since October and reached $19.2 billion in early December, the highest level in two years, according to Coinglass

It seems liquidity providers, who are meant to meet this demand, appear well-prepared as they have accumulated the necessary liquidity and hedged their positions.

Another signal is a recent study, State of Crypto OTC 2023 Edition, by Finery Markets in partnership with CCData. The report stated that many institutional players sought a more secure market structure than crypto exchanges last year. So they turned to the crypto Over-the-Counter (OTC) market,  estimated to be worth $1.4 billion daily. 

As a result, a crypto-native liquidity provider named Wintermute demonstrated a +400% growth in its OTC trading volumes in the second half of 2023. Due to its nature, OTC liquidity remains invisible to market observers.

But, as retail and traditional financial institutions start incorporating bitcoin (BTC) into their investment strategies, what will be the ripple effects, and how will this new demand spread across global on-exchange and over-the-counter (OTC) markets? 

Coin representing bitcoin next to a graphic showing the cryptocurrency's price variation

Crypto OTC reached $1.4 billion in daily trading volume

The spot OTC market size figures the considerable scale of market activity, especially considering this estimate was made throughout the bear market. However, average daily volumes in the OTC crypto market remain lower than the average spot volume for Centralized Exchanges (CEXs), recorded at $23.4 billion daily. 

The new solid inflows in recently approved ETFs suggest a significant potential to capture the OTC space as a market since players will seek reliable and secure liquidity sources. The space is maturing, and more sophisticated institutional players are entering the market due to improved accessibility and regulatory clarity. 

This shift towards OTC setups is one way to mitigate counterparty risks as markets provide bilateral trading agreements between counterparties parties. That is an advantage because it reduces reliance on centralized intermediaries and offers the capacity to execute large-scale trades without significantly affecting the market.

Tighter spreads on OTC during high volatility

The report also explores trade data during high volatility, covering the period in March 2023 when Silicon Valley Bank collapsed, with $42 billion in withdrawals processed in a single day. 

To analyze bid-ask spread patterns, considering that the spread paid by the liquidity taker is a part of their total trading cost, the study focused on the spread behavior for different order sizes of BTC-USDT (1 BTC and 10 BTC), examining both OTC and CEX markets. 

The results demonstrate significantly tighter spreads in OTC markets, regardless of the trade size, highlighting the consistency of OTC market execution regardless of size and volatility.

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2024 outlook for crypto OTC

Most OTC crypto liquidity providers faced growth in their client base in 2023 relative to the previous year. This expansion is not merely quantitative; it reflects a broader trend of increasing engagement and confidence in the OTC crypto trading environment.

The recent approval of the ETF may complement this trend because:

  • Will attract even more experienced TradFi professionals to the industry, thereby further enhancing market infrastructure;
  • Competition among ETF providers will encourage the adoption of best execution practices;
  • Portfolio managers and traders will prioritize the quality of liquidity and execution to meet their investors’ expectations.

It also signifies a potential shift in the regulatory climate, creating a more favorable environment for strategic trading and risk mitigation in which bitcoin becomes a mainstream investment asset.

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