In its latest quarterly report, Square said its payments app now trades Bitcoin through “private brokers” rather than “public cryptocurrency exchanges.” This means that the majority of Bitcoin trading will come from private over-the-counter (OTC) brokers rather than open public exchanges.
The change, details of which were revealed this week, is a step toward providing more professional Bitcoin trading services, according to many cryptocurrency experts. Experts say that by ditching public exchanges in favor of stockbroker channels, Square can build a faster, more secure platform that creates less volatility when trading large volumes of Bitcoin.
Square representatives declined to comment on the matter.
Public crypto exchanges are vulnerable to hacks, with similar hacks causing users to lose tens of millions of dollars over the past few years. Transactions on these exchanges also take a long time - sometimes hours, even days - and are never instantaneous. In addition, many exchanges display information about order books, which gives their competitors the opportunity to track transactions and use them for their own purposes.
According to Hunter Horsley, CEO of Bitwise Asset Management, moving to an OTC platform could solve many of these problems. Trading can proceed faster because no deposits are required from the user to place an order. This method is also more reliable, as Bitcoin transactions are much safer than crypto exchanges. Orders will not be displayed, so market activity on the Square platform will be more comfortable.
“There are many advantages to trading using OTC, which, of course, prompted developers to make this change.”
Price slippage
One of the biggest advantages of switching to OTC is protection from the so-called “slippage” of price.
Slippage occurs when an investor sells a huge amount number of bitcoins on a public exchange, causing the price of bitcoin on the exchange to plummet after an order is placed. By the end of the order, the investor may end up with significantly less money than expected.
According to Horsley, a single Bitcoin order of a couple million dollars can lower the price of the cryptocurrency on a public exchange by 5-10%. The rate of price slippage is much lower when using OTC platforms - 0.5-2%.
It is still unclear which OTC Square has entered into an agreement with at the moment.. In June, Bitcoin brokerage firm Genesis Trading, which is owned by Barry Silbert's Digital Currency Group, announced its partnership with Square after the latter received a digital currency trading license from the New York State Department of Financial Services.
Square first launched its Bitcoin trading service to a limited number of people in the fourth quarter of 2017, followed by a full-scale launch in the first quarter of 2018. The price of both Bitcoin and Square's shares have risen markedly since the launch of Bitcoin trading.
Despite their best efforts, Square is currently making little profit from its Bitcoin service. In the second quarter of 2018, the company earned approximately $400,000 in net income from service revenue of $37 million. That's a slight improvement from last quarter when the company earned $200,000 on $34 million in revenue.
Square CFO Sarah Friar said no one at the company expected the service to generate much profit anytime soon.
“It's not monetization mechanism,” he said. “Our goal is to continue to diversify the Cash payment application.”
According to https://www.cnbc.com
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