1/. let's clarify a few points on how OTC trading works and how it impacts markets. When a customer comes to an OTC desk - on Telegram or WhatsApp - he will request a quote: "can i please see a price for 1,000 BTC - approx $4mln?"
2/. the market maker is going to check the liquidity available in the market - the exchange order book depth - and see at what price he can buy and sell 1,000 BTC
3/. if he can sell at say 3,950 and buy at 4,050 he will add his commission on top of it - say 50$ and come back to you by showing you a firm price: "3900 / 4100 per bitcoin, good for 1,000 units"
4/. This is what we call a "2-way" quote. 3,900 is the market maker's "bid" and 4100 its "offer". As a customer, you can buy at 4,100 by "lifting the offer" or sell at 3900 by "hitting the bid". You just have to answer "i buy please or (i sell)".
5/. The quality of the quote is measured by its tightness - what we call the "bid-offer spread". Here the spread is 4100 - 3900 = $200, 5% of the price of bitcoin. Not great given the amount of volumes in crypto markets!
6/. When you confirm the trade, the market maker will execute it at market on exchange to hedge its position and lock-in its commission. That's why most of OTC volumes are reflected on exchange volumes. Sometimes it's not when the risk is warehoused or the trade is crossed.
8/. Buying 1,000 BTC at market today on Coinbase would cost you $4,400 per coin, almost 10% of premium to spot for only a $4mln trade. Not good.
9/. Like in FX, the liquidity for physical bitcoin is fragmented across exchanges so market makers will usually put together the various order books - "aggregated order books" - and execute across venues. Still, the liquidity for physical bitcoin is not great.
10/. This is where Bitmex comes in and market makers start looking at "proxy hedging" to show tighter prices. Proxy hedging is the process of hedging a trade with another instrument that has more liquidity and is very correlated. See Bitmex vs Coinbase here. 
11/. Bitmex is interesting because it has an orderbook depth that is 10 to 20x the size of Coinbase for instance. That means cheaper liquidity and more margins :) But is it an effective hedge?
12/. Monitoring the performance of the hedge is key as the market maker will be running what we call the "basis" risk - the difference in price between the bitcoin physical price and the bitmex's perpetual swap he used to hedge. See how tight it is.
13/. So what's the liquidity like on Bitmex? Below is how much you have to pay (without fees) vs spot to buy/sell $10mln in %. On average 70 basis points over the last 24h. Remember on Coinbase, it's close to 10% for $4mln!
14/. the bid offer spread is also stable - on average 1.3%. All in all, traders on the sell-side spend a lot of time monitoring liquidity conditions and build increasingly sophisticated system to improve their pricing.
15/. Hope this will help for people using OTC desks on considering the quality of the quotes they are getting. If you get charged 1%+ to buy $1mln worth of bitcoin, you should maybe return it! There is more to cover on execution and other topics but this is a start!
