But perhaps the biggest advantage of moving to an OTC is protection from what’s called price “slippage.”
Slippage happens when an investor sells a large chunk of bitcoin at once on a public exchange, causing the bitcoin price on the exchange to fall as the order is placed. By the time the order is filled, the investor could end up selling at a lower price than intended.
Horsley said a bitcoin order worth a few million dollars could often cause a 5 to 10 percent price slippage on a public exchange. But that number improves to a 0.5 to 2 percent slippage rate on an OTC desk, he said, allowing Square to move blocks of bitcoin in one big transaction.
“Prices, net of fees, are often better, especially for large orders,” he said.
The move off exchanges was also likely motivated by a desire to be more compliant, said Demirors of CoinShare. The nature of Square’s business draws a lot of scrutiny from regulators and banks, and partnering with OTC desks and private brokers, who are generally perceived as “far lower risk,” can work in its favor, she said.
It’s unclear which OTCs have partnered with Square so far. In June, Genesis Trading, a bitcoin brokerage firm owned by Barry Silbert’s Digital Currency Group, announced its partnership with Square, shortly after Square secured a virtual currency license from the New York State Department of Financial Services.
Square first launched its bitcoin trading service to limited people in the fourth quarter of 2017, and made it publicly available in the first quarter of this year. Both Bitcoin’s price and Square’s share price jumped after the launch of its bitcoin service.
Despite these moves, Square isn’t making much money from its bitcoin service. In the second quarter, Square made about $400,000 in profit on $37 million of revenue from bitcoin transactions. That’s a slight improvement from the quarter before, when it made a profit of $200,000 off $34 million in bitcoin revenue.
During an earnings call with reporters on Wednesday, Square CFO Sarah Friar said that the bitcoin service isn’t expected to be a huge growth driver anytime soon.
“It’s not a major monetization engine,” Friar said. “The goal is to continue to drive utility in the Cash app.”