Institutional crypto investing is experiencing its new normal. The onset of the crypto winter has dulled speculative activities bringing long-term institutional adoption into renewed focus.
Aside from the crypto-native professional trading community, large TradiFi institutional investors remain undeterred by crypto’s short-term performance as of late. Having done the necessary due diligence into digital assets, many view the crypto winter as an entry point. A snapshot of these investors include family offices, who look to diversify their personal wealth; and TradFi hedge funds and algo trading firms looking beyond equities and commodities.
Crypto Prime Brokerage as an Enabler
Crypto prime brokerage will be a key service layer essential to riding the momentum of institutional forays. Particularly, these white glove services are similar to forex trading that institutions are familiar with. However, the true opportunity lies in the dissimilarities in where they operate — crypto markets vs. traditional ones.
For example, the crypto market is known for its fragmentation and pre-funding. Fragmentation spreads liquidity across venues, making it inefficient to manage different margins in multiple exchanges. Additionally, the pre-funding requirement in exchanges is very different from TradFi, where funds will be kept with a prime broker or a futures commission merchant.
The combination of liquidity fragmentation and pre-funding requirements are the pain points that a crypto prime broker can address through capital optimization. Crypto prime brokers can offer a single point of access to liquidity with the necessary credit lines, while reducing cost of execution with top-tier fees to each exchange, irrespective of traded volumes, which is important in the current muted environment.
More Down the Road
Crypto prime brokerage is still evolving. The majority foresee its scope expanding to different types of executions such as going long on one DeFi protocol and short on an exchange (i.e. Ce-DeFi prime) while capitalizing on the influx of OTC volumes. Matrixport is a leading global provider of custodian and prime services for crypto hedge funds pushing the boundaries of what is possible in crypto prime services, offering unparalleled DeFi connectivity across 11+ EVM chains and 40 whitelisted Defi protocols.
The taste of crypto prime brokerage is not going to be one flavor and investors will need someone who will be able to broker all of that in one. Particularly, players that are able to evolve their services will stand out of the crowd, such as successfully replicate a hybrid model of prime with centralization, along with digital ledger technology (e.g. using smart contract applications on settlements). Other areas of value-add service innovation would include incorporating research-driven trade ideas coupled with capital introduction programs to jointly scale assets under management.
There is no doubt that crypto prime brokerage will attract the capital that could be the launchpad for our industry’s next big leap. The key is the evolution of its financial and technological features to drive efficiency and trust, ensuring that institutional interest is converted into active participation.