on the crypto
Despite bitcoin trading near historical highs, many institutions continue to buy bitcoin and use over-the-counter (OTC) trading companies to prevent their purchases from impacting the overall market.
Bitcoin and large institutions
Unlike retail investors or smaller institutions that use cryptocurrency exchanges, large institutions usually trade bitcoins (quotation BTC) through the OTC market, noted John Todaro, director of institutional research at crypto analytics firm TradeBlock.
In this way, their transactions do not impact the prices as they would have been if investors had used the large centralized exchanges. One reason is that OTC transactions are also much less transparent than exchange trading.
For this reason, it is difficult to monitor or evaluate this side of the crypto market. However, three different metrics observed by blockchain analysis firm CryptoQuant provide an idea of what is happening in the OTC cryptocurrency market by anticipating that in the coming weeks, larger institutions may reveal their bitcoin positions.
What is happening to the Bitcoin market?
When a massive bitcoin outflow occurs on Coinbase Pro, the money tends to move to Coinbase's cold wallets for safekeeping that hold 6.000-8.000 BTC, according to Ki Young Jun, CEO of CryptoQuant.
"We just know it won't go to hot wallets because we have address labels," added Ki. "Withdrawals from users of an exchange can happen, but I'd say 99% of large single transactions over 5.000 bitcoin are internal transfers or go to custody wallets."
Coinbase Custody is directly integrated with Coinbase's OTC desk, which means its customers can leverage the OTC desk without having to move funds from cold storage. Both MicroStrategy and British investment firm Ruffer revealed that their purchases of hundreds of millions of dollars of bitcoin were facilitated by Coinbase.
Another metric, the flow of funds ratio for all exchanges, declined after the market sell-off in March. This is the ratio of the volume of network transactions of exchanges to the entire cryptocurrency transferred over the network.
What does a low number mean ...
A low number means fewer transactions that are performed on exchanges and are instead conducted outside of exchanges such as over-the-counter. Notably, the last time the fund flow ratio was at its current level (around 5%) was when major cryptocurrency exchanges launched their OTC desks in early 2019.
The third parameter, the total amount of bitcoins transferred to the blockchain, continued to grow. This, coupled with the decrease in the flow of funds ratio, indicates that potential massive OTC transactions by institutions such as these are "ongoing," Ki said.
"What we are seeing is a whole class of investors who are new to the cryptocurrency market and want to establish positions," said Matthew Hougan, chief investment officer of Bitwise Asset Management. “They are not so much buying in decline as they are simply buying, consistently and over time”.
