January 14, 2019

Bitcoin OTC: From Hell To Heaven

We explore the current state of the OTC market with all its deficiencies and inefficiencies as well as propose a new way of looking at things based on the latest technologies.

Bitcoin OTC: From Hell To Heaven

The OTC (over-the-counter) market in bitcoin is booming. Online exchanges, while being good value and trend indicators, do not provide a comprehensive look at the market, a significant part of which is represented by private deals. These deals happen between two private individuals or two companies directly or with participation of intermediaries.

The Obvious Problem

Usually, there are no strict guidelines or procedures to follow, so market participants conduct deals with varying deal-flows based on their or their clients’ preferences. Below are the types of deals as seen from our perspective as a broker:

  1. Paradise: a simple deal, in which the buyer trusts the seller (and vice-versa), and the exchange happens without any intermediaries.
  2. Heaven on Earth: two consenting parties conduct a transaction using a trusted intermediary, such as a brokerage firm or a software platform.
  3. Hell: each party is represented by its own agent and transact only after the two agents have agreed upon the terms of the deal.
  4. Pandemonium: “I know a guy who knows a mandate who has a client who has an account with an escrow service provider, and we’re looking for a counterparty willing to go through the same process with us!”

Few have a luxury of living in Paradise. Sending money directly to the counterparty requires a high level of trust, that is why such parties are either friends (or friends of friends) or regulated principal trading desks with established reputations.

A lot more people inhabit Heaven on Earth. However, deal sizes in that domain are limited. The buyer and seller can trust their bitcoins to a certain software platform only so much. In another case, a single broker may be reputable in the buyer’s eyes, but completely alien to the seller. This leads us to where most OTC deals happen today.

Indeed, being your client’s agent and finding a counterparty that fits the criteria precisely can be torturous and may take a long time. What is it, if not Hell? But it gets worse in the capital of Hell, Pandemonium! Expect numerous intermediaries, complex legal structures, endless phone calls, escalation and frustration. Deals may take weeks to close, and the conversion rate, as you understand, is very low.

To summarize, the following deal barriers exist today:

  • Multiple intermediaries: you spend a lot of time on introductions and finding “common ground”. A don’t forget: they all want a cut!
  • Cumbersome legal process: escrow providers and law firms have to draft agreements that work for everybody. More time and, of course, more fees!
  • Low close rate: you are likely to start over multiple times until your deal is finally closed. A waste of time and money (consider the opportunity cost in the fast-paced environment that is Bitcoin).
The bitcoin OTC market (we are not the originators of this meme).

The Elegant Solution

It is our belief that the bitcoin standard will be achieved a lot faster if its technological component is used a lot more widely. Just like bitcoin as a censorship-resistant store of value makes central banks obsolete, technologies built on top of it make numerous legacy structures completely irrelevant.

Finally, we arrive at the Holy Grail: Bitcoin’s multi-signature walletcapabilities. Multisig wallets and services built with them eliminate or significantly reduce trust in third-parties, giving full control to the parties involved in the transaction. And the good news is that they have been around for a while and they work!

Just imagine how much precious time and money you can save by completely bypassing escrow agents and law firms while being extremely confident that your deal will go as planned! The dinosaurs of the legacy world don’t like hearing this, because they do not want to lose you as a client (those commissions are juicy!), but ignoring reality has never never helped anyone.

Embrace The Change

We salute those who live in Paradise (we are part-time residents, too)! However, our mission is to bring Heaven on Earth to the vast majority of the deals of any size happening in the OTC corners of the bitcoin realm, and we have the tools to do it.

“You never change things by fighting the existing reality. To change something, build a new model that makes the existing model obsolete.” — Buckminster Fuller

Today, using multisig contracts is a badge of honour. Tomorrow, avoiding them will be a red flag.