Extreme volatility and Bitcoin price points that dropped below “safe” support level of $20,000 last week made headlines around the world. But wild price swings are nothing new in the crypto world, and whether you’re a believer or a skeptic, digital assets can no longer be ignored.
In a report published earlier this year by crypto compare, crypto derivatives volumes reached an all-time high of close to $3 trillion dollars, accounting for more than 60 per cent of trading in all cryptocurrencies. This is no surprise, given the use of derivatives to protect against market uncertainty, of which there is a lot right now. Much of the activity is dominated by retail investors, done on exchanges in jurisdictions with little or no regulatory oversight; however institutional investors have been driving the trading of crypto futures contracts on regulated exchanges like the CME to record highs.
Other traditional exchanges have followed in CMEs footsteps, with SIX Exchange and Eurex now offering various crypto derivative products in a push to be a part of the lucrative Crypto Trading market. Similarly, crypto exchanges are expanding into the traditional derivatives space, with growing demand for leveraged products from their retail investors, and with desire to attract more professional investors.
But can traditional and crypto firms work side by side? Often these firms have considered themselves to occupy opposite ends of the financial market’s spectrum. However, as both sides look to attract new business and remain competitive, they are now finding themselves conforming to the same frameworks and policies, adopting the same innovative technologies, and managing the same risks in rapidly evolving markets.
But while they begin to converge to a similar end point, the challenges each face along the way are quite different. Traditional capital markets firms need to evolve their current infrastructure to accommodate this new asset class a lot more rapidly than they are used to, while Crypto firms suddenly find themselves operating under regulatory scrutiny they were previously not used to, with a need to acquire the knowledge to support traditional asset classes and products.
So how do firms keep up? Partnership is key. New deals or partnerships that blur the lines between traditional and crypto markets have been growing steadily over the last few years. In recent months we have seen several high-profile crypto exchanges acquire smaller traditional operations to push into conventional derivatives markets. This has allowed them to fast track their regulatory status in markets like the US, by acquiring regulated platforms that already offer futures and options to their clients. Similarly, there has been a wave of partnerships that have allowed traditional capital markets firms to quickly adopt the technology and infrastructure required to support crypto trading.
At KRM22 we are an experienced risk technology company with considerable crypto experience. We have worked with the first movers in the digital asset industry to help support their risk and compliance needs.
While this new asset class has its own nuances, it leverages a host of similar models and processes (central order books, prime-brokerage style offerings, omnibus accounts, market-making) that are familiar to all capital markets players. KRM22 is in a prime position to embrace this new evolution with our market, compliance, operational and enterprise risk offerings. As crypto currencies become more salient to the financial system, we are defining the best practice of leveraging, adopting and transforming traditional risk management tools towards this market.