Several of the trading obstacles for the adoption of cryptocurrencies and digital assets have been overcome, through the advent of derivative instruments. The next frontier of development in the space lies in expanding the number of protocols being used, together with further education to help the asset class and its investors continue to evolve.
By Angele Paris – Several of the trading obstacles for the adoption of cryptocurrencies and digital assets have been overcome, through the advent of derivative instruments. The next frontier of development in the space lies in expanding the number of protocols being used, together with further education to help the asset class and its investors continue to evolve.
The growth of the crypto derivatives market has meant investors now have access to the asset class through familiar instruments – ones which mirror those used in traditional financial markets. “The flourishing derivatives space is of the main changes we’ve seen over the last year,” explains Justin Buitendam, Director of Business Development & Sales, Matrixport, “It’s a maturing area and gives institutional investors the ability to employ more sophisticated strategies; something which wasn’t available in crypto before.”
For example, fund managers and other institutional investors can use these instruments as a hedge against volatility. They can make more sophisticated trades to smooth out returns through bull and bear markets. “It doesn’t eliminate it completely, but these trades can mitigate some of the risk they’re taking within their long only portfolios,” Buitendam observes.
Crypto derivatives can also be used to generate yield in a zero-interest environment. “Crypto is able to offer yields which aren’t seen anywhere else. These yields are generated either through staking or lending products where investors can lend their assets out to other trading firms or reputable institutions, who will pay a yield on them,” outlines Buitendam, “This allows investors to earn an income from these strategies.”
And he expects this area to expand even further: “Clients are asking for a deeper derivatives market, which Matrixport has been able to deliver by launching Bit.com – a crypto derivatives exchange.”
Although several barriers to entry have been reduced, Buitendam stresses one of the primary remaining obstacles revolves around regulation, particularly in the US: “There are regulations in the US which have made it hard for certain funds to be able to trade into crypto exchanges around the world. These players ultimately need an offshore fund or vehicle to do that.”
Knowledge is key
So, from a trading perspective, crypto and digital assets are now easier to understand because the trades are similar to what investors already know in traditional finance. This means those who are focused on trading can buy and sell crypto derivatives without necessarily having in-depth knowledge of the underlying technology. “As a trader, you’re trading a price structure and movement. So pure trading desks that generate alpha through quant functions can replicate similar trades in the crypto space as there are multiple coins and tokens they can use,” Buitendam highlights.
However, the value of learning more about the blockchain technology which powers cryptocurrencies and digital assets should not be discounted. “With any investment technique, knowledge is key; Understanding your risks and risk metrics is something that’s very important. Investors are able to gain significant amounts of knowledge as there is a lot of easily accessible information available on various projects – it’s not hiding in the shadows anymore,” emphasizes Buitendam.
He says how at the click of a button, anyone, from a retail investor to a sophisticated institutional investor can have access to information about blockchain projects – what is being built and how it’s being done: “They’re able to learn about the projects in real time. This something that’s very exciting and I’m very happy to be a part of it.”
The power of reputation
One aspect of investing in crypto which Buitendam says needs further focus, in terms of education, is related to counterparty risk: “A deeper understanding of counterparty risk will help the adoption of crypto currency by institutional investors progress. Also, as businesses like ours grow and build their reputation, investors’ sense of security improve. In addition, the product innovation we offer gives them an added layer of surety which starts to eliminate some of that counterparty risk. We are very protective of our reputation and our highly secure custodial services.”
Getting to grips with the way custodial services are delivered in the crypto space is another facet of investing here which players must consider. “We’ve seen the maturity of custodians grow which also provides investors with additional comfort. The Matrixport offering in this space, Cactus Custody, offers institutional investors access to the world’s first MetaMask Institutional (MMI) integrated custodian able to support MMI’s multi-chain capabilities and all EVM compatible chains.”
This feature called “DeFi Connector” offered by Cactus Custody enables institutional clients seamless and secure connection with decentralised finance (DeFi) protocols via MMI.
Further DeFi growth
In terms of his outlook for growth, Buitendam anticipates further progress in the DeFi segment: “We presently have over USD100 billion locked in DeFi projects which are yielding, staking and earning through different DeFi protocols. Most of this used to be locked in the Ethereum protocol but through custodians like us, these protocols have advanced and we’re seeing a move towards other protocols.”
GameFi, Webfree and the metaverse are a few of the specific examples in which he believes will grow and develop: “These are evolutions which represent the new world and things our customers have been asking for. As a firm, we pledge to continue to innovate and meet our customers needs as we move forward and further into this digital universe.”
Justin Buitendam, Director of Business Development & Sales, Matrixport
Justin leads institutional sales for Bit.com, a crypto derivatives exchange powered by Matrixport, Asia’ fastest growing digital assets financial services platform. Based in Australia, Justin is responsible for driving business development and collaborates across Matrixport’s global ecosystem to shape business strategies and engagements. Justin has over two decades of experience in trading derivatives and held senior trading and portfolio management roles with companies including Macquarie Bank, Transmarket Group, RKR Capital and Refco.
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