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There are multiple ways to acquire bitcoins. Retail buyers prefer the convenience of quick-buy apps like Cash App or local bitcoin kiosks (HoneyBadger). Larger volumes are normally traded through exchanges or brokerage firms.
As our clientele is comprised of high-net-worth individuals, companies and institutional investors, we will focus in this article on avenues that provide liquidity to this segment of the market.
Exchanges vs Brokerages
Many people bought their first bitcoins on online exchanges, principally because several years ago there were a lot fewer options available. In our view, however, exchanges are more suitable for active traders rather than single-purchase clients. Moreover, exchange interfaces are not straightforward for non-traders: order books, price charts, multiple order types and other tools that clients coming from various backgrounds simply do not understand.
But the biggest problem lies in liquidity: even the most established bitcoin exchanges are not very liquid. A single large market order can move the spot rate significantly. If you are a sophisticated trader, you may choose to utilize multiple exchanges at the same time as well as apply algorithmic trading techniques to your order execution.
In traditional forex markets, if you wanted to exchange USD for EUR, you would go to a local exchanger, who is essentially a broker trading either on a large trading platform or with another, bigger, broker. High liquidity of forex markets allows for thin spreads and multiple intermediaries between your exchange price and the spot rate.
Similarly, most large-volume bitcoin buyers prefer to go to a broker, who will do the trades for them. Upon delegating trading activities, the advantages for investors become quite clear:
- You deal only with one entity
- Order procedures and execution are a lot simpler
- In many cases, your order does not move the market—you get a flat rate
Bitcoin Brokers: From A to Z
The over-the-counter (OTC) market for bitcoin is already quite diverse. While it cannot be considered as mature as in traditional finance, the pace of development is as fast as you would expect from a young market with massive potential. Below, we give a brief overview of the types of brokers you may encounter when searching for a liquidity provider for your needs.
Believe it or not, the cash market is still strong and even thriving in many jurisdictions. Peer-to-peer exchanges, like Hodl Hodl and Localbitcoins, are full of listings from individuals and companies that will exchange your cash for bitcoins and vice-versa. If you think that such offers are limited only to retail-sized volumes, think again—some offers sit comfortably in the six-figure range.
As cash is usually difficult to deal with logistically, expect to pay a hefty premium for such trades: anywhere between 1% to 20% depending on jurisdiction and competition.
The same platforms host a number of private traders who buy and sell bitcoin using their own liquidity and personal bank accounts. Some of them, like Dong Zhao, have a highly established reputation in the OTC market.
They normally charge from 1% to 5%.
There is a class of brokers, who do not trade themselves, but refer clients to traders for a commission. These affiliates are usually fond of networking and are, thus, well-connected. When someone they know wants to buy or sell bitcoin, they help them find a counterparty to trade with. Their services are appreacited, because a brokerage firm may get business that it would not otherwise. However, oftentimes there are multiple such brokers involved in deals—of course, they all want a cut! (See Bitcoin OTC: From Hell To Heaven)
With each added middleman, buyers or sellers should expect to add from 25bps to 100bps to their expenses.
Principal Trading Firms
A lot of volume is pushed through principal trading firms. Such companies utilize their own liquidity to trade with clients by taking positions at their own risk. You deal with one party without any intermediaries.
There exist several large-scale trading firms, who enjoy vast amounts of their own liquidity and employ armies of traders, and many more smaller trading desks, who often resell quotes from the "big guys" (just like our forex example above).
Large-scale operations offer lower spreads on trading, anywhere from 10bps to 50bps, depending on multiple factors. Smaller brokerages operate under the "industry standard" of 80-100bps.
Trusted Custody Traders
There is a subset of brokerage firms that may be referred to as "trusted custody traders". They are well-connected in terms of liquidity and can acquire bitcoins just as well as principal traders. However, since they run smaller operations with minimal liquidity of their own, they utilize a trust-based method: you send them your funds upfront, they use their liquidity partners to execute a trade on your behalf and then settle with you. Procedurally, such deals are not much different, but they may take a few more business days to complete, primarily, due to banking delays.
Trusted custody traders charge from 1% to 2%.
Of course, some firms can provide hybrid services: they may trade with you themselves or find a counterparty that you are be able to trade with directly.
At L2B Global, we are looking to innovate in the space and expand the types of trades that can be performed by clients. The firm's approach focuses on technological solutions to common problems: our multisig bitcoin escrow allows for non-custodial direct trades between buyers and sellers, while being a functionary on the Liquid sidechain introduces immense new opportunities for broker-exchange and broker-broker trade-flows as well as near-instant fiat currency settlement. Firms, such as AquaNow, create new ways of trading by developing sophisticated order routing tools. It is clear that new technology will soon overtake phone calls, chat groups and legal structures—driving liquidity up and spreads down.