I read an article about China ban on exchange, which mentions that
... the ban on exchange-based cryptocurrency trades will not extend to over-the-counter (OTC) transactions.
I am confused over the terms exchange-based and OTC. What are the differences between these two?
Exchange-based transactions, ;
Exchanges bring together brokers and dealers who buy and sell these objects. These various financial instruments can typically be sold either through the exchange, typically with the benefit of a clearinghouse to cover defaults, or over-the-counter (OTC), where there is typically less protection against counter-party risk from clearinghouses,
This is the case if you for example buy altcoins on Bittrex.com, Or poloniex.com All these transactions Are ""Exchange-based".
This means in the case of cryptocurrencies, that it is done through a third party, and you don't know the seller of the currency.
OTC transactions :
Over-the-counter (OTC) or off-exchange trading is done directly between two parties, without the supervision of an exchange. It is contrasted with exchange trading, which occurs via exchanges.
Transactions which are done on exchanges, take for example stocks being traded on stock exchange. Here the exchange and clearing house takes care of settlement. This gives very few options for trading with derivatives like future and options.
On the other hand, many a time, two parties may enter into over the counter transactions without going through exchanges and they could be presented with many new exotic derivatives that suits their need. Investment banks generally do it over various underlying assets.
