If you have a background in traditional finance, you may be familiar with the concept of “capital markets”.
According to Investopedia, “Capital markets are where savings and investments are channelled between suppliers – people or institutions with capital to lend or invest – and those in need.”
Basically, capital markets are the various branches of the financial ecosystem that people’s assets flow through each day.
If you’re interested in working with digital assets, you may be wondering how the concept of capital markets carries over into this emerging space. It’s important to understand how the ecosystem works if you want to invest in this space – and equally important to be able to connect to each branch with ease, security, and speed.
We’ve created this ecosystem map to walk you through the current state of capital markets in the crypto industry:
Let’s take a look at each segment of the crypto capital markets ecosystem in more detail.
A cryptocurrency exchange is a business that allows customers to trade cryptocurrencies or digital currencies for other assets, such as fiat money or other digital currencies.
Some cryptocurrency exchanges, like Coinbase, have served customers interested in buying crypto since the early days of bitcoin; new options with different benefits (such as supporting certain tokens) continue to emerge as well.
Globally, some of the top crypto exchanges include: Binance, Coinbase, Kraken, Bitfinex, FTX, Bitstamp, Blockquake, Voyager, and Gemini.
Liquidity Providers/ Market Makers
In traditional finance, “liquidity provider” is essentially synonymous with “market maker”.
In general, the function of a liquidity provider is to enable others to trade assets of some kind by providing a pool of shares (which they own), so that buyers and sellers can trade easily without having to locate and deal with other individual traders. Basically, a liquidity provider makes an asset “liquid” by being available to facilitate buying and selling of assets or pooling assets to meet demand.
This definition carries over into crypto. In our industry, a liquidity provider is a user who funds a liquidity pool with crypto assets they own to facilitate trading on the platform, and subsequently earn passive income on their deposit.
Some of today’s top crypto liquidity providers and market makers are: B2C2, Genesis, Amber, Galaxy, Woorton, and GSR.
Crypto lending enables borrowers to use their crypto assets as collateral to obtain a loan in a more “traditional” currency, such as fiat currency or a fiat-tied stablecoin. Of course, this can also work in the inverse (in this case, a borrower would use fiat as collateral to obtain a loan in crypto).
Lending desks come into play by providing whatever assets are needed to complete the loan – with a previously agreed-upon interest rate. In the crypto world, lending desks tend to be more retail-facing (e.g., Celsius and BlockFi), while lending desks are more institutional (e.g., Genesis).
Some of the industry’s top lending desks include: BlockFi, Salt, Genesis Capital, Celsius, Nexo, and Hodlnaut.
Decentralized finance, colloquially known as “DeFi,” is a blockchain-based form of finance that makes it possible for buyers, sellers, lenders, and borrowers to interact directly peer-to-peer.
DeFi cuts out the central financial intermediaries people are used to dealing with – such as brokerages, exchanges, or banks. Instead, DeFi offers equivalents for these financial instruments utilizing smart contracts on blockchains, the most common being Ethereum. There’s no middleman involved in DeFi, only software.
This means DeFi is open to anyone to use, as users don’t need to be approved by any sort of central institution. Unlike a bank account, DeFi doesn’t require that you have a government-issued ID, Social Security number, or even proof of address. This makes it an exciting possibility for the world’s unbanked population (estimated at 1.7 billion people).
Today, some of the top players in DeFi – some of whom are helping larger financial institutions get in on the action – are: Aave, Compound, Fulcrum, Kyber Swap, Codefi, and Oasis Labs.
Crypto mining is a key part of how a blockchain is developed and maintained.
Mining brings new coins of a specific cryptocurrency into circulation, while also confirming transactions on the network. To accomplish this, miners must solve a complex computational math problem using powerful computers. The first miner to find the solution to each problem is given the next block of crypto as a reward, and then the process starts over.
There are a number of mining companies and teams leading the field today. They include: Genesis Mining, Ethermine, Gigawatt, BitFury, and Spark Pool.
Asset managers apply professional trading, investing, and portfolio management to crypto. This can take the form of managing their own funds, offering funds to clients, or transacting in crypto on behalf of clients.
There are two broad types of asset managers that will engage with digital assets: traditional asset managers and alternative asset managers.
Traditional asset managers include active and passive mutual funds (offering actively managed digital asset funds and strategies or passively managed ETFs/ETPs), 401k/retirement providers (offering digital assets as part of a mix of retirement assets), and Registered Investment Advisors/High Net Worth Individuals (offering digital assets on a more personalized service level).
Alternative asset managers include hedge funds (institutions that manage funds on behalf of clients and can invest in a variety of asset classes, including crypto), venture capital firms (institutions that invest in protocols via token sales or look to engage with digital assets to earn a return on investor money), private equity (institutions that tend to tokenize assets), and family offices (institutions that engage with digital assets on behalf of wealthy families).
How do I get access to crypto capital markets?
What’s the best way to connect to all of these branches of the ecosystem and tap into this emerging asset class?
Today, some firms accomplish this manually by managing the deposit addresses in Excel, using test transfers, sharing exchange login credentials across multiple teams, or relying on hardware wallets with a “4-eyes” policy.
These are complex, manual processes that introduce a multitude of risks such as human error, internal fraud, or capital inefficiency. However, if your operations are small and you’re still growing your AUM, that approach might be manageable.
On the other hand, many market participants use the Fireblocks Network as a connectivity and settlement layer, essentially running their treasury operations on Fireblocks to ensure assets are transferred securely and efficiently.
The Fireblocks Network is basically SWIFT for crypto. It connects you to all the relevant crypto capital markets parties without any of the complications or security risks normally associated with crypto transactions. The Fireblocks Network connects users to more than 600 liquidity partners, trading venues, and counterparties out of the box – that means every major exchange, OTC, liquidity provider, and trading venue is available to transact with from day one.
With 750+ tokens and 22 protocols supported, Fireblocks also offers the widest token support in the industry, as well as a fiat integration.
Interested in learning more about the Fireblocks Network? Read our security whitepaper to learn everything you need to know about the current state of crypto security – and how the Fireblocks Network comes into play.
Fireblocks is an enterprise-grade platform delivering a secure infrastructure for moving, storing, and issuing digital assets. Fireblocks enables exchanges, lending desks, custodians, banks, trading desks, and hedge funds to securely scale digital asset operations through the Fireblocks Network and MPC-based Wallet Infrastructure. Fireblocks serves over 1000 financial institutions, has secured the transfer of over USD2 trillion in digital assets, and has a unique insurance policy that covers assets in storage and transit. For more information, please visit www.fireblocks.com.
Register for the Hedge Fund US Digital Assets Summit here.