This Is How the Mega Rich Buy Bitcoin

Zoran Spirkovski

Buying Bitcoin can be a complicated matter, especially for the super-rich who want to take advantage of the digital revolution without getting their hands dirty with mining. Going to the exchange like a regular retail investor, they could, with a click of the BUY button, pump the price rapidly, losing a lot of value in the market correction that follows.

The same risk applies when selling their Bitcoin once they are ready to make an exit.

Big trades on-exchange can have massive effects over the price. On June 25, 2020, miners decided to sell approximately 3,000 BTC on Bitfinex, pushing the price down from $9,700 to $9,300. 

The total loss of the move was approximately $1,200,000 USD.

Instead of having a reliable fixed price, the miner experienced price slippage, severely affecting the average price. 

If trading on an exchange is out of the question, only one solution remains. 

Over-the-counter Bitcoin.

When we talk about OTC Bitcoin there are two different possibilities. The first one leads to direct ownership of Bitcoin, while the second means owning Bitcoin through a financial product, such as shares in a Bitcoin Trust fund. 

Both of these options have their pros and cons, but direct ownership is in many ways superior to the alternative. More on this later.

Why Are the Wealthy Choosing Bitcoin OTC?

Buying Bitcoin OTC provides the well-off with a private and efficient platform for making high volume trades without upsetting the current status quo. 

No waste of asset value, and no loss of time. 

In the above-mentioned case, the sellers lost approximately $1,200,000 USD simply because they provided too much selling pressure to one particular exchange. 

This wouldn’t happen on the traditional stock market as it is centralized. Crypto exchanges are many, so all of the liquidity is somewhat diluted, enhancing the negative effects of large trade orders.

Investment funds, wealth managers, and accredited investors understand the damaging effects of going directly to an exchange. This is why they look for alternative solutions to preserve the value of their assets. 

They make their trades out of the eye of the public, directly with the seller or buyer.

OTC Desks Versus Managed Bitcoin Funds

I’d like to buy 350 BTC, please.

“We can offer you a price of $9250 per BTC.” - a typical answer from an OTC desk agent as they provide valuable service for their clients.

Before getting to this stage of the interaction however, the investor needs to verify themselves.

Extensive KYC and AML requirements need to be fulfilled, a proof of residence and income provided before you can make a request to buy BTC.

Retail investors can buy 2 BTC on some exchanges. with no KYC, but this is impossible if you are going to sit on the big table. KYC is even more extensive for investment funds and accredited investors. The benefits of going through the process are appealing, as you get access to:

  • Static prices

  • Liquidity

  • Minimal fees

The OTC desk will provide you with a personal broker after the onboarding process. The broker will be your point of contact for all quotes, to answer your questions, and make you an offer if you decide to sell. 

OTC desks have a minimum order value, or sometimes minimum monthly volume. There are no OTC desks that work in exactly the same way. Every one of them is unique in the way they provide the service, the fees they charge, and additional services they may offer.

Buying Bitcoin from OTC desks

Prices will usually be somewhat higher compared to current market prices. OTC desks calculate the spread they charge based on the current market liquidity and volatility of the exchange they represent. 

If they are not affiliated with an exchange, they usually charge a specified fee of anywhere between 0.1% to 1%.

Regardless of the relatively higher price, it is still a better deal to go through an OTC desk, compared to going directly to the market. You will also have more time to finalize the payment and receive a fixed price quote that can last for a few days. 

The problem with buying Bitcoin from an OTC desk is connected to issues related to ownership. Keeping your digital assets secure from hackers can be difficult. 

When you buy from an OTC desk, you will receive Bitcoin to your wallet address after you wire the necessary funds to an account provided by the desk. You will be 100% responsible for the security of your assets. 

Make sure to learn the best security practices and invest in a great hardware wallet.

Alternatively, you may be able to get custody from the OTC provider and have them keep your assets safe and guaranteed, in exchange for a fee. If you are interested in this option, speak to your chosen OTC desk broker.

Exchange-based OTC desks are usually the most reliable. Before committing to a trade make sure to do your due diligence and always use escrow if possible. 

Here are the most reliable OTC desks according to Nomics:

Managed Bitcoin Trust Funds

The second option of getting a large amount of Bitcoin is going through FINRA-regulated financial institutions. 

Managed Bitcoin Trust Funds enable you to free yourself from the burdens of owning and securing Bitcoin directly. Instead, you can buy shares at specific times when the fund is open to new investments or via an OTC stock broker.

These shares equal ownership of Bitcoin held by the fund, however, they are not easily settled. Regardless of the immense amount of work and effort these companies have invested in convincing the regulators, they are limited by them in many ways. 

Investors that get in on the ground floor, i.e. directly as an investment in the trust, agree to a specified lockdown period during which they cannot sell their shares. After this period has passed, you can sell your own shares to retail investors on the OTC market through brokers. 

Additionally, trusts usually cannot offer a buyback program and provide investors with a way to claim the Bitcoin entitled to them due to regulatory limitations, and they charge maintenance fees usually around 2% per year.

At the time of writing, there are only two legitimate Bitcoin Trust Fund choices for the informed investor. 

Grayscale Bitcoin Trust 

 

Managed Bitcoin Trust Funds 

The second option of getting a large amount of Bitcoin is going through FINRA-regulated financial institutions. 

Managed Bitcoin Trust Funds enable you to free yourself from the burdens of owning and securing Bitcoin directly. Instead, you can buy shares at specific times when the fund is open to new investments or via an OTC stock broker.

These shares equal ownership of Bitcoin held by the fund, however, they are not easily settled. Regardless of the immense amount of work and effort these companies have invested in convincing the regulators, they are limited by them in many ways. 

Investors that get in on the ground floor, i.e. directly as an investment in the trust, agree to a specified lockdown period during which they cannot sell their shares. After this period has passed, you can sell your own shares to retail investors on the OTC market through brokers. 

Additionally, trusts usually cannot offer a buyback program and provide investors with a way to claim the Bitcoin entitled to them due to regulatory limitations, and they charge maintenance fees usually around 2% per year.

At the time of writing, there are only two legitimate Bitcoin Trust Fund choices for the informed investor. 

Grayscale Bitcoin Trust 

The shares of this trust are the first publicly quoted securities that are 100% invested in Bitcoin. Grayscale sets the price of the shares only when onboarding new investors, and the rest is up to the market. 

Grayscale provides investors exposure to the price movement of Bitcoin, through a traditional investment vehicle. The result is a smooth investment experience, without the trouble of going through the buying, storing, and securing process.

Public quotes are available on OTCQX.

One GBTC, (Grayscale Bitcoin Trust Share) contains 0.00095896 BTC. To own at least 1 BTC in the fund, you will need approximately 1,042 shares.

Grayscale has been observed to deviate a lot from the actual price of Bitcoin, typically enhancing price movements exponentially. 

At the peak of $20,000 per BTC on the retail market in 2017, GBTC (Grayscale’s Bitcoin shares) reached a peak of $40,000 per BTC, and investors in the fund paid a 100% premium.

Grayscale was registered by the SEC as a regulated financial product after filing in 2019.

Grayscale is by far the most popular traditional Bitcoin-based financial product. The trust owns approximately 386,500 BTC in their holdings, and they are focused on claiming an ever larger stake of the pie.

VanEck SolidX Bitcoin Trust

Similar in shape and form to Grayscale, with only a few differences, the VanEck SolidX Bitcoin Trust 144A Shares (XBTCZ) are the first open-ended and DTC-eligible bitcoin securities that can be held in brokerage accounts.

The XBTCZ is designed to emulate traditional ETFs. It’s only available to qualified institutional buyers and provides them with an effective way to buy and hold bitcoin using a cleared security. The XBTCZ is available with many traditional and prime brokers, enabling investors already engaged with the financial markets to easily take part in the Bitcoin revolution.

In terms of objectives, they strive to reflect Bitcoin’s price, deducting the expenses in the process. According to VanEck, the Bitcoin holdings are protected in cold storage, and they are audited by A-rated underwriters against the loss of theft.

As an investor, regardless of the outcome, your assets will be secured. However, you will face a lot of liquidity issues with this trust, as the volume is $581k USD at the time of writing.

Compared to Grayscale, VanEck charges 2.9% for managing their fund, further cementing the conclusion that it is a far inferior choice for investors.

Benefits and Weaknesses of Bitcoin OTC options

There are pros and cons to both of these methods for obtaining a stake in Bitcoin without going to an exchange. The clear winners are Bitcoin OTC desks, and that’s not only because of the low fees they provide compared to Bitcoin Trust Funds.

Bitcoin Trust Funds mimic the price of Bitcoin in an unhealthy way. They extrapolate the movements drastically, often falling and rising more than 50% compared to the real value of Bitcoin. This is certainly a volatile place with limited liquidity, as investors are struggling to get in and out of their positions, causing massive shifts in price.

While it makes sense for investors that are already highly involved with the U.S. stock market and brokers to take part in these trusts, they should still be aware that from the start they are paying at least a 10% premium just because they chose to go with a fund. 

Sure the managing fee is 2% on a yearly basis, but this doesn’t account for the moment when you want to sell your shares, as brokers will butcher your profits along the way. Unless Bitcoin’s price exploded in the meantime.

Either way, you are better off owning Bitcoin directly, as this gives you the opportunity to take advantage of massive price movements. For example, if you buy into a fund today, get locked in the position for 12 months, and  Bitcoin reaches a new all-time high halfway through the year, you are left holding the bag, with no possibility of taking advantage of this great opportunity.

Managed Bitcoin Trust Funds are limited by design, which works for traditional stocks and indices, but doesn’t really provide the flexibility necessary to deal with the volatile nature of cryptocurrency markets. 

OTC desks provide you with a premium experience, tailored to your needs. Your transactions are private and kept off the markets, protecting your investment for the long term. They are also available when you want to sell your assets for a profit. The fees are negligible compared to price slippage, making it an easy win-win deal for both the OTC desk and the investor.

* Exchange services are significantly limited for users with no KYC verification.

What About Retail Investors?

Retail investors have no need for Bitcoin OTC desks, but they can buy Bitcoin Trust Shares from a regulated broker. The process of creating an account with a broker is painstakingly annoying and by the time your application is approved, you are already able to interact with the smaller OTC desks around the world.

For example, we looked at Interactive Brokers and in order to get your account there, you must have Liquid Net Worth of at least $20,000 USD. There are other requirements, such as providing a proof of identity, residence, and income, as well as answering a lot of other questions.

To create your account you need to provide 16 pieces of information, agree to 8 agreements provided by the broker, and once approved, agree to lose 8% of your profits for the privilege of buying these shares. 

If you are a retail investor wondering about whether you should get yourself an account, please don't get GBTC or XBTCZ. 

It’s not worth it. 

Your time and energy are better spent on finding the best cryptocurrency exchange, where you will pay anywhere between 0.1% and 0.5% per trade, and pennies to withdraw your funds.