As the bear market continues to squeeze yield opportunities for investors, some are choosing to evolve their crypto strategies as a way to remain capital-efficient. Notably, with yield from CEX no longer easily accessible, institutional investors are now blending their CeFi (centralized finance) and DeFi (decentralized finance) strategies to get the best of both spheres.
However, this is not an easy journey. The CeFi and DeFi spaces are notorious for their siloed operations, primarily shown in how they execute bilaterally with pocketed clearing. Also, conducting due diligence and building up in-house risk-management practices for a field they have limited knowledge of would require significant time and capital investment.
That is why many are gravitating toward crypto-native prime brokers, as advisers that are adept with risk management as well as trade execution.
Built-in risk management
It goes without saying that recent industry developments have placed risk management on top of investors' minds. Particularly, the demand for best-practice risk management coupled with robust infrastructure is increasing in crypto, as echoed by the recent remarks by the CFTC chairperson.
Prime brokers precisely cater to this demand with built-in risk management, from credit risks and liquidity risks to counterparty risks, offering a prudent path to crypto opportunities amid market volatility. This includes assuming clearing and intermediary risks – a service that banks are not able to provide.
Furthermore, some crypto-native prime services offer added transparency by offering clear and dedicated client communication, empowering investors to resolve uncertainties regarding their investments. This is also supplemented by custodial services, enabling institutions to tick compliance requirements like audit trails while strengthening crypto management.
Enhanced connectivity & collateralization
Working with a prime broker also enables investors to manage their portfolio margins comprehensively with better connectivity and collateralization. By being a single point to manage funds, such as unified trading accounts, prime services support investors to save a significant amount of time and effort to find multiple service providers to connect to both CeFi and DeFi.
On one hand, for CeFi, institutions can perform cross-exchange transfers and access competitive fee tiers without unnecessarily concentrating capital on each exchange, built upon the prime broker’s secure API (application programming interface) connections and partnerships. For DeFi, they offer means to participate in DeFi to lend, stake and trade, backed by robust research by prime brokers to identify reliable connections and protocols.
The connectivity to market opportunities is enhanced by the prime broker’s ability to offer margin lending opportunities that cater to the investors’ credit demands. With the support of a stable funding pool, prime brokers allow institutions to borrow a wide range of assets, from stablecoins to altcoins, at favorable rates, amplifying their leverage capability and profitability.
Wall Street solutions and advice for crypto
Last of all, prime brokers provide access to products that are similar to many Wall Street investment vehicles seen in the traditional asset management space. From products like ETFs to strategies like dollar cost averaging, these help institutions better navigate the fast-evolving crypto space through familiar solutions, tailored across the full range of risk-return profiles and investment horizons.
This is a journey supported by advisers who understand the crossover between TradFi (traditional finance) and crypto. They step in to ensure that investors understand how these TradFi-similar products work in the crypto sphere as they may be quite different at times. Prime brokers work with their institutional clients to decide which instruments and tools are the best fit for them. The demand for crypto-savvy advisers is being felt in TradFi, as seen in the crypto-asset management hires made recently by traditional investment funds.
An example of a crypto-native prime broker would be Matrixport, among many others. The firm currently serves more than 500 institutions globally, offering margin lending and crypto trading accounts connected securely to CeFi and DeFi. The digital assets platform has introduced many industry-first structured products for institutions to benefit from market opportunities while understanding associated risks. Crypto investing platforms like Matrixport operate industry best practices across risk management and custody and provide dedicated advisers to support their clients – critical for onboarding institutions – and ultimately building trust in the industry while enhancing accessibility to digital assets sustainably.
The path ahead
Institutional investors should be well prepared for the obstacles they face when obtaining the ROIs (return on investments) that crypto has become known for.
Especially in this phase of volatility that shows no signs of ending, however, a lack of in-house expertise and connections can make crypto investing more complicated than ever before. By working with prime brokers like Matrixport, institutions are gaining the best chance of sharing in the marketplace’s upside without getting their fingers burned.
Prime brokers are setting the stage for the next phase of digital asset evolution, which is moving away from speculation and evolving toward asset management. As institutions are willing to take part in this journey, it is up to the prime brokers to professionalize the industry and seamlessly welcome the new money entering the space.
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