Another Doorway For Institutions? Prime Brokerage Services Are Coming to Crypto

Cryptocurrencies are continually evolving and adapting to a world where they are much welcomed. However, it is the world of investment and trading where they have indeed found a home. The cryptocurrency market has become a popular alternative on the rise, being tested against traditional ways and means. 

Cryptocurrencies started as merely digital cash-like tokens that allowed people to buy things on the internet. However, the popularity of Bitcoin and its astronomical price explosion in 2017 caught the attention of the traditional markets and enticed many investors to buy up the asset and hold on. 

That speculative accumulation of Bitcoin was one thing, but more advanced traditional traders started to realize that financial products and services could be well served in the space. Futures trading emerged from CME and CBOE in the USA, and while that side of the world waits for ETFs, there are options in the rest of the world to buy these types of cryptocurrency funds. 

Yet, the belief is that the majority of traditional investors and traders are still sitting out on the cryptocurrency markets for lack of familiar settings. One such missing aspect in the cryptocurrency is that of prime brokerage, which is limiting the development of the crypto trading sphere. 

The potential of prime brokerage

It seems odd that the cryptocurrency market place has evolved so much and mirrored so much of the traditional space, yet still lacks prime brokerage. The idea of prime brokerage in the conventional markets sees a bundled nest of financial services that investment bankers and other major financial institutions - like Goldman Sachs - offer large investment clients.

These larger investors often diversify and need to be able to borrow securities or cash in order to engage in netting to achieve absolute returns; this is where the prime broker comes in as a centralized point to allow for this diversification.

Thus, some of the services provided under prime brokering include securities lending, leveraged trade executions, and cash management, among other things.

With regards to the cryptocurrency market, there is clearly a place for overlap here as having a centralized point in order to effect different trades and investments in the space can be highly beneficial. 

Having single and direct market access to all tier-1 liquidity venues across different financial instruments, including tokens, futures, and other derivatives can empower clients in the cryptocurrency space greatly. 

There is a huge evolution of services in the cryptocurrency space which offer different levels of success, but bundling them together and having direct access to them can help multiply the gains achieved from single investment strategies.

Of course, if one starts to expand this further and offer a prime brokerage service to institutions, the benefits start to have a dual nature. A new market can open up with a higher chance of success for institutions who want to tap this expanding and growing market. More so, the market gets a bigger boost of normalization and legitimacy by having such investors involved through traditional investment means, like prime brokerage. 

It is this potential gap in the market that TroyTrade has spotted. After raising $10 million in a private round from investment firms such as BlockVC, NGC Ventures, Consensus Labs, Bixin Invest and more - TroyTrade has developed a solution aimed at professional traders and institutional investors in the cryptocurrency space. 

The platform will provide crypto prime brokerage services for such institutional clients and professional traders with bevy trading products on a platform that can tap into vast liquidity, as well as being able to boast customer-friendly UX.

Understanding its importance

Recent news in the traditional markets can spell out how important prime brokerage can be. And, with the cryptocurrency market slowly integrating with these traditional ways and means, it is not a far stretch of the imagination to predict crypto prime brokerage being just as important down the line. 

In January this year, it was reported that big banks were throwing extra resources into prime broking, betting that their embattled hedge fund clients would provide a much-needed revenue boost as other areas falter.

The Financial Times report added that despite hedge funds taking a pummeling over the last three months of 2018 in choppy market conditions, executives in the banks’ prime broking divisions that handle their trading and lend them money still expect the smartest managers to outperform.

In fact, looking at 2018, the first quarter of that year saw prime brokerage revenues jump 20 percent to $4.9 billion for the largest investment banks. Prime brokerage is the fuel that hedge funds use to increase their trading activity – in so doing, increasing the revenues earned by prime brokers for giving up a balance sheet.

TroyTrade has identified the power and potential of this trading offering and will look to launch in the cryptocurrency space in Q4 of this year with an eye on what Goldman Sachs has achieved with its prime brokerage role in the traditional market. A report from the Wall Street giant showed net revenues being up12 percent YoY with 2018 having the highest net revenues since 2010.

A new door for institutions

Throughout the cryptocurrency space, the talk continues to be a lingering feeling of waiting for institutions to jump in. However, there are still significant gaps in the market that are keeping them at bay, however, by launching a prime brokerage aimed at these institutions that are curious, the barriers to entry are lowered substantially and could have big effects.