The invisible engine: How OTC trading powers Bitcoin ETFs

In traditional finance, over-the-counter (OTC) trading represents direct transactions between parties, bypassing the structured environments of formal exchanges. This mode of trading is extremely important when it comes to dealing with instruments not listed on exchanges, such as bonds and certain derivatives. The significance of OTC trading is underpinned by the flexibility it offers, allowing for customized trade agreements tailored to the specific needs of the parties involved.

The importance of OTC trading is further emphasized by the sheer size of the markets it supports. According to the Bank of International Settlements (BIS), the notional value of outstanding OTC derivatives reached $632 trillion in June 2022.

Over-the-counter trading has always been an indispensable but often overlooked part of the crypto market. The launch of spot Bitcoin ETFs in the U.S. has put OTC trading in the spotlight, as these products rely heavily on OTC markets for their operation. Authorized Participants (APs), who are responsible for creating and redeeming ETF shares, use OTC markets to acquire or offload large quantities of Bitcoin.

Understanding the nuances of OTC trading — how it operates, its benefits, and potential risks — becomes increasingly important due to the growing size and impact of these ETFs. In this report, CryptoSlate will dive deep into the intricacies of OTC trading to provide a comprehensive understanding of this often overlooked but vital component of the market.

As the crypto market matures and intertwines more and more with traditional financial systems, the role and influence of OTC trading are bound to increase even further, making it a crucial area for informed analysis.