As the market creates different ways for institutions to invest in crypto currencies, these new players need experts in the field to help structure their offerings and investments.
By Angele Paris – As the market creates different ways for institutions to invest in crypto currencies, these new players need experts in the field to help structure their offerings and investments.
“In the US, many traditional institutional investors are exposed to crypto through prime brokers, while European investors’ exposure is mainly through exchange traded products. Actually, many would rather be exposed to the underlying asset or a derivative directly, but they lack the necessary tools and providers to mitigate counterparts risk,” outlines Oliver Yates, CEO, SheeldMarket.
To support institutional investor interest in the space, Yates says they need standard tools (regulated or not) to manage and report client holdings i.e. NAV calculation with standard settlement prices, certified accounting by the Big Four.
In its efforts to further encourage this progress, SheeldMarket’s goal is to provide professional investors with direct access to digital assets. The firm wants to make financial services more accessible and efficient for every business, from SMEs to major funds.
There are still several barriers and challenges to institutional adoption of crypto and digital assets, including the high counterparty risk, lack of governance mechanisms and unstable connections and back-office infrastructure. Other difficulties include a lack of globally recognised data references which prevent real best execution and the fact there is currently no way to check who the counterpart is or identify the origin of funds. Also, staking and lending are hard to evaluate from a quantitative risk perspective. All of this makes investing in crypto and digital assets a struggle for institutional investors.
“The best prices and liquidity can be found on exchanges like Binance, FTX or Huobi, but they are off-limits for institutional investors,” notes Yates, “In addition, the volatility means many asset managers do not have the mandate to invest in crypto. Many institutional investors still lack fundamental education on what the crypto market is – starting with the fact that there is no more single crypto market, but instead multiple verticals.”
Breaking down the barriers
In Yates’ view, having a central counterpart taking up the role of a clearing house can help investors trade on exchange without exposing customers to their counterparts risk directly. He also suggests “Permissioned” DeFi like AAVE Arc as a possible way of mitigating the issues institutions face when looking to allocate. “The problem is that rates and performance are currently not nearly as attractive as they are for the rest of DeFi. Centralised lending firms should also provide clear documentation on their flows and risk management mechanism,” he adds.
Despite these challenges, the market presents a number of attractive opportunities. Yates comments: “For large asset managers, there is a temporary yet interesting opportunity in converting their cash holdings into stable coin. This means they can lend them out at a better rate than what they would get through traditional loans. Of course, as large allocators pour in, the rates will lower. The negative interest rates from central banks have also pushed large allocators into the space.
“For hedge funds, there are currently many serious projects – either in infrastructure, DeFi or NFTs. This gives them the opportunity to place numerous high risk/high reward bets. These investments provide capital efficiency, giving hedge funds the ability to offset/leverage spot and derivatives. Hedge funds can also use agile yield products to make dormant capital earn interests.”
Laying his personal outlook for the crypto markets in view of rising inflation, Yates identifies that the the crypto and NFT markets took a collective hit at the same time as other high risk asset classes. “It is possible that most investors still view crypto as a high-risk asset class, and not a hedge against inflation. As rates go back up, crypto might stay in the lows.
“On the other hand, until very recently crypto and equities were inversely correlated, so the price slump might be a coincidence. BTC is, by construction, a deflationary asset (supply is finite) but unlikely impacted by the current outlook. If anything, current political instability in eastern Europe may see a higher demand for cryptos.”
Oliver Yates, CEO, SheeldMarket
Oliver is the CEO of SheeldMarket, and has been in the crypto space for years. In 2016 he built the first blockchain-enabled insurance contract for the largest French insurer. In 2017 he was in charge of a research project on Ethereum security exploits at his university laboratory. In 2018 he helped design risk & trading signals for cryptocurrency funds at Merkle Data, in the Bay Area.
Register for the Hedge Fund US Digital Assets Summit here.
