Firms are developing ways for cryptocurrency investors to participate in the traditional economy of stocks and bonds; and simultaneously working on systems to facilitate professional and institutional investors to access the cryptocurrency economy.
Caspian is among the most interesting efforts from the start-up world. The start-up has just raised $19.5m with an initial coin offering — not a colossal sum by the exuberant standards of the ICO market in late 2017, but impressive in today’s more sedate and sceptical climate.
Caspian is an institutional grade trading platform. It embraces the standards for compliance, KYC and AML that prevail in traditional finance, including restricting trading to ineligible parties as a feature within the platform.
Perhaps more importantly, Caspian is one of the few platforms to take credible steps to address the liquidity problem in cryptocurrency. For institutions looking to buy and sell millions of dollars' worth of cryptocurrency at a time, doing so without causing price gyrations can be a problem.
The traffic on most single exchanges is simply not big enough to cope with the size of orders institutional clients deal in. The largest cryptocurrency exchanges transact around $100m of bitcoin daily.
Caspian approaches this problem by giving its clients access to 25 exchanges through one platform. Sell orders for, say, $25m worth of bitcoin will be routed out to various different exchanges automatically to ensure the most efficient execution.
“The system looks at the liquidity profiles of the particular token and at the client’s volume participation strategy, then slices the order out to various exchanges,” said David Wills, Caspian’s CEO.
There are plenty of other features to Caspian’s platform — mostly risk management and liquidity floors to ensure traders never represent too large a proportion of the volume in a particular coin, which should offer some confidence to institutional grade investors, looking for a means of getting exposure to cryptocurrencies.
While established players have lagged behind start-ups, their advantages in scale, reach and, frankly, legitimacy have lent their contributions a certain weight in comparison to many of the efforts from start-ups.
Fidelity is launching an institutionally-focused cryptocurrency investment platform. Like Caspian, it will provide investors with a smart order router to ensure the best liquidity available.
Crucially, Fidelity Digital Assets, Fidelity’s standalone crypto offering, will provide custody for cryptocurrency assets. Holding cryptocurrency securely is possible, but requires complex infrastructure quite different from traditional assets. Despite their reputation as digital, non-corporeal assets, cryptocurrencies are safest when stored physically — offline in the form of private keys granting wallet access.
The absence of a reputable custody service has kept a lot of institutional investors out of the crypto market. Investors are unwilling to develop the knowledge and infrastructure required to hold their own cryptocurrency in a secure and compliant fashion, but with firms like Fidelity making plays, that barrier may soon be removed.
BNY Mellon, State Street, Goldman Sachs and Northern Trust are all working on providing custody services for cryptocurrency. Caspian’s Wills said: “These are great developments. It’s the building blocks of institutionalisation. At the moment, crypto is still too cumbersome and manual, compared to traditional markets, but the pipes are being laid and the efficiency is coming.”
Crypto-funds getting access to traditional assets
But the traffic is not all one way. At the retail level, investors are increasingly looking for opportunities to earn money from their cryptocurrency holdings.
If you’re not ready to give up exposure to bitcoin, but you’re prepared to admit that it probably won’t be worth $50,000 in time for Christmas, those with substantial holdings have very little opportunity to earn money from their cryptocurrency.
Panxora accepts cryptocurrency as collateral, allowing holders to trade in stocks without sacrificing their exposure to their crypto-assets.
Investors give Panxora, say, $10,000 worth of bitcoin. Panxora holds it in “airlocked cold storage” — offline, in a wallet not connected to the blockchain and therefore more secure — and Panxora purchases $10,000 worth of, say, IBM stock with its own fiat currency.
Any profits from dividends or stock value appreciation are swept into the client’s cryptocurrency holdings.
Should the cryptocurrency collateral lose value, Panxora is prepared to allow its clients to become up to 50% leveraged before it scales down their exposure, although CEO Gavin Smith told GlobalCapital that customers can choose to restrict themselves to a smaller degree of leverage.
Should the stock lose value, investors lose a commensurate proportion of their capital.
Panxora also offers a cryptocurrency spot trading platform and, in 2019, will be launching a crypto-focused hedge fund. As such, Smith welcomes the arrival of Caspian as a useful utility. “Larger and better regulated exchanges are very helpful for us. We have to spread our volume across many different exchanges and if we can trade across fewer platforms, that makes things easier.”
Panxora assigns exchanges a rank from one to three, based on the amount of confidence it has in them, and caps the amount of business it does there accordingly.
Smith also welcomes Fidelity and the other institutions making plays as cryptocurrency custodians: “We’ve invested a lot of money in our cold storage facilities for cryptocurrency, but it’s not our core business. We’d be happy to have a big, credible name like Fidelity.”