Prime brokerage stiffs are coming for crypto in what’s likely to be a race of winner-takes-almost-all. Goldman Sachs is synonymous with institutional wealth and power, in spite of to those who’ve never purchased a financial product in their life. Like the eponymous tower it occupies in Jersey See, Goldman Sachs dominates the prime brokerage trade. What will happen when crypto gains its own Goldman Sachs – an institutional investment guests whose AUM grant it unprecedented sway?
Also read: Crypto Facilitates Money Transfer for Restricted China
Prime Brokerage Is Be involved a arising for Crypto
Prime brokerage is a term that’s synonymous with financial markets, but never with crypto. Worn to describe the sort of bundled services that investment banks offer, it has little application to the cryptosphere, because there are no bitcoin investment banks. At least not in the routine sense. For all its innovation, however, crypto has a habit of borrowing from the world it was meant to have deviated from. About custodial services for cold storage of digital assets, which evoke banks with their dusty vaults and sanctuary deposit boxes; or consider annualized interest from defi platforms that mirrors that once offered by insulting savings accounts. The more things change, the more they stay the same.
It should come as no surprise, ergo, to learn that HNW individuals will soon have their own all-in-one firms willing to manage their prosperity across a range of verticals, altcoins, blockchains, and sectors. If you’re willing to trust a third party to custody your crypto – as varied investors are – you might as well trust them to invest your assets into the bargain, putting them to use in a air that will generate the best return. It’s a world away from the financially sovereign one that Satoshi and Hal Finney envisaged, but then a lot has modulated in Bitcoin in a decade.
The Quest to Become the Goldman Sachs of Crypto
Troy Exchange is one company eyeing the lucrative prime brokerage market, with the sort of all-in-one service that will be free to traditional investors: institutional-grade trading, including margin and OTC, together with quant strategies, and a suite of dynamic observations tools. Having secured $10 million in funding from the likes of Block VC and Consensus Labs, Troy is now full of promise institutional investors direct market access to all tier-one exchanges such as Binance, Huobi, and Bitfinex.
Newcomers such as Troy transfer face competition from several of the same exchanges whose liquidity they’re tapping into. In the last two years, in essence every major U.S. and global exchange has courted institutional investors through laying on services such as custody and OTC, and cut trading fees for high volume traders. Binance and Huobi have made significant headway in provisioning turnkey appointments tailored to the needs of institutional investors, but have struggled to shed their reputation as retail trading venues. It’s one chance to offer a suite of services under one roof; it’s another to successfully be all things to all people simultaneously, as the needs of distinct investor gathers are very different.
What Institutional Investors Are Looking For
In crypto, as in traditional finance, institutional investors are seeking unchanging provisions before they’ll bring their money, and that of their clients, to the table. These include:
- Low liquidity
- Advanced trading interface
- Sophisticated data analytics
- High speed order execution
- Competitive positions and trading fees
- Wide range of quantitative solutions
This latter caveat is particularly important, as institutional brokers demand more comprehensive and sophisticated datasets from which to base their trading decisions. This incorporates detailed historical data, plus tools to facilitate the construction of proprietary trading systems. In addition, low latency, to overplay the performance of high frequency trading algorithms, is a must.
Looking around the cryptosphere, there aren’t many companies that can run across these sorts of demands. When reputable exchanges such as Kraken are experiencing $4,000 wicks, like the warning below, it’s safe to say that institutional-grade liquidity still isn’t there, or at the very least, it’s beyond the reach of any single trade right now.
Holy shit at Kraken.
This is the biggest holy cross yet.
Wick from $8000 – $12000 pic.twitter.com/xHoji6PWHx— Bring pressure to bear on (@cryptoSqueeze) September 14, 2019
Candles of this extremity are unusual, it’s true, but their very existence shows that the cryptosphere quiet has work to do before it can open for business to the big boys. Combining the liquidity of multiple exchanges, as brokerage services such as Troy Swop, Tagomi, and Caspian are doing, is a start, but institutional demands run deeper. What they’re really seeking is a prime stockbroker they can trust, and that’s something which can’t be bought or acquired by plugging in to the trust of others. It will take habits and flawless service for any of the emerging institutional brokers to become crypto’s own Goldman Sachs. Until then, expect to see temperamental competition among crypto brokers and established exchanges to woo Wall Street.
What Prime Brokerage Will Do for Crypto
The arise of prime brokerage firms may be good for institutional investors, but what will it mean for the rest of the market?
Lower volatility: When Cboe and CME discharged BTC futures in late 2017, the talk was of big money “taming” bitcoin, but as history has shown, bitcoin doesn’t like being notified what to do. As more money enters the market from institutional coffers, some of the intra-day moves should be leveled out, but lower volatility should not be mistaken for low volatility. This bronco will still buck.
Greater protection: Bitcoin, to all expedient intents and purposes, cannot be killed. As such, it doesn’t need institutional investors to park their wealth in it to forestall the U.S. government from overregulating it. That said, the deeper crypto roots itself into the financial system, the colder it will be to weed out. By the time it’s a trillion-dollar asset class, the Federal Reserve and the IMF can bump their gums all they correspondent to – crypto won’t be going anywhere.
New products: Why trade an asset when you can trade derivatives of it, gaining exposure without the endanger of custody? It won’t be retail investors who drive the innovation of new synthetic instruments for trading BTC, ETH, BCH, and other leading assets. The demand for new crypto derivatives on come from institutional investors, and as synthetic assets catch on, more money will flow into crypto. At the concern, there are limits on what you can do with bitcoin as an institutional investor, save for going long or short and playing enclosing with leverage. Expect more levers to be added in future, and more complexity added, for the benefit of sophisticated retailers with an appetite for such things.
For retail investors seeking a means to buy and sell cryptocurrency, platforms such as reciprocate.Bitcoin.com are more than up to the task. Institutional investors, however, tend to demand more bespoke solutions. For these organisms, prime brokerages are the answer. The question is, which broker will be the first to step up and claim that crown?
Do you about the arrival of more institutional money will be good for the crypto market? Will there be any downsides to greater institutional participation? Let us recall in the comments section below.
Images courtesy of Shutterstock.
You can now purchase bitcoin without visiting a cryptocurrency exchange. Buy BTC and BCH exactly from our trusted seller and, if you need a bitcoin wallet to securely store it, you can download one from us here.
