The OTC market may reflect the real demand for Bitcoin, with the largest transaction valued at $50 million

How will the world's financial elite diversify their assets in light of Brexit? The big question on every fund manager and their clients' minds this weekend was:

I posted a tweet this morning (which has since been retweeted and commented on by many!) that I felt compelled to explain in a few more details.

One of the key themes in a previous article I wrote in 2014 was that the Bitcoin exchange infrastructure was not yet in place for the average person on the street.

To summarize the content of the previous article (dated March 31, 2014), entitled "Finding Balance":

Exchanges lack trust and place restrictions on purchases

Consumers are now scared, MtGox took about $500 million worth of Bitcoin and is now bankrupt. No one really trusts exchanges, even some of the smaller ones that have been established in the past three months. The only "safe" place to buy Bitcoin in the United States is Coinbase, and they are not an exchange (note: at that time Coinbase had not yet started an exchange business).

The United States did not have a single licensed Bitcoin exchange, and the rest of the world was still reeling from the MtGox scandal. Bitstamp seemed like it would become the new global exchange, however, negative media coverage kept new potential Bitcoin users away.

As far as I know, most people who want to buy or sell Bitcoin are doing so “off-book,” meaning that the transactions are conducted through a trusted network. This removes the need for buyers to purchase on the market, and ultimately obscures the true supply/demand curve for Bitcoin.

Therefore, compared to the "buy orders" in exchanges, which usually drive up the price of Bitcoin, these trade orders do not have a significant impact on the market price of Bitcoin.

In my blog post two months ago, I pointed out:

Trust is strong among bitcoin exchanges and platforms such as Bitstamp, which recently received approval from EU regulators, and Coinbase, Kraken, Circle, BitX and others are also in the process of applying.

In that article, I did not mention what was happening in the over-the-counter (OTC) markets.

The OTC market continues to grow, and there are an estimated 10-15 official OTC brokers, of which 3-4 are well-known and trustworthy, such as Harry Yeh of Binary Finance. In the case of LocalBitcoins, they handle small transactions, but there are also many exchanges that facilitate large OTC transactions.
I know of many very wealthy people who want to buy Bitcoin who don’t trade on exchanges. The restrictions on exchanges clearly don’t allow them to do so. If a high net worth individual has a net worth of $100 million and wants to put $1 million of that into the Bitcoin market, it would significantly affect the price if it were to be placed on the open market. This transaction of nearly 1,000 BTC would obviously push the price higher. Instead, he would contact a broker, agree on a price (usually a few dollars above the spot market price), and then execute the trade outside the market. The broker would match the buyer and seller, and this transaction would not significantly affect the market price. Now, imagine if a billionaire wanted to allocate 0.5% of his assets to Bitcoin, which is obviously not easy to do on an exchange.

Before writing this article, I did some background research, contacted several OTC traders, and gathered these data points:

In the OTC market, the largest trade I could find so far was worth about $50 million . For trades of this size, orders are processed in batches. The broker usually divides them into 6,000–8,000 BTC to prevent the market price from moving up. He will match the buyer and seller and then transfer the balance of the account.

According to my sources, the number of buyers in the OTC market has increased by 66% this year, while the number of sellers has increased by 33%, but since Brexit last week, more buyers have entered the OTC market, which at this point will not have a big impact on the Bitcoin market price.

The core point of this article is that the trading volume of Bitcoin exchanges does not represent the real market of Bitcoin demand and supply. In addition, many transactions on the exchange market are just arbitrage transactions back and forth, which are not actually real demand (such as for buying and holding), so the trading volume of exchanges is usually seriously exaggerated. For example, I can use $10,000 to make dozens or even hundreds of transactions a day with a robot, but these transactions do not actually make much sense, but it greatly inflates the trading volume on the exchange.

The wild swings in the price of Bitcoin this week have given me a lot to think about, and taught me that using the trading data on Bitcoin exchanges, while a little bit useful, doesn’t tell me the full picture of the supply/demand basis of the entire market. And the new, high-asset group, they don’t buy Bitcoin through Bitcoin exchanges, but look for brokers to buy it.

Technically, if I want to buy $50 million worth of Bitcoin, what stops me from shorting the market with $2-5 million, forcing the price down, and then buying $50 million worth of Bitcoin from OTC dealers with panicked customers? Market manipulation, while unlikely, is entirely possible in thin trading conditions. When the Bitcoin price and market are large enough and its market liquidity is stronger, 10,000 BTC transactions (enough for an OTC batch transaction) will not significantly drive the market price.

Taken together, this means that there may still be a lot of money from the global financial elite sitting on the sidelines, waiting for the right time to move in, in light of Brexit and other global political events.

The latest Bloomberg article simply proves my point, but what they fail to notice is that 1% of them are not using exchanges…