Understanding the frustrations when trading crypto
Active traders and Institutional investors are entering the cryptocurrency markets in increasing numbers as they continue searching for ways to include digital assets into their portfolios. As of 25 April 2018, daily trading volume across all major digital asset exchanges exceeded $30 billion and many professionals are predicting volumes to continue growing exponentially well into the future. RBC Capital Markets for example, predicts daily volumes will increase to $10 trillion over the next 15 years.
Unfortunately, cryptocurrency investors face several challenges if they intend to trade in a professional capacity. Until solved, these challenges will continue to hold back the flood of institutional capital that is still waiting on the sidelines.
Unreliable Trade Execution
The current fragmentation of digital asset exchanges, coupled with relatively low trading volumes as compared to traditional markets, creates high slippage and liquidity costs for large participants. Even comparatively small order sizes have the potential to consume all available liquidity on a given trading venue, causing significant execution slippage from current market prices.
Additionally, since most existing crypto exchanges began as small ventures and have grown organically as the market has surged, they have not been designed to handle the large volume of orders expected from institutional and high frequency traders. Even the largest, most reputable trading venues suffer from high latency when compared to traditional equity and futures trading venues, creating problems for institutional investors who require virtually instant execution. A lack of adequate customer support often compounds such problems, as highlighted by numerous cases of users being locked out of exchanges for days due to technical difficulties.
Trading across traditional and crypto markets presents a number of other challenges beyond periodic performance failures of the venues themselves. Professional traders need to access both environments with quick and reliable fiat on/off ramps. In addition, they must be able to rebalance portfolios to ensure that they maintain certain allocation and risk targets, a task made extremely difficult by the aforementioned fragmentation and unreliability of existing liquidity venues.
Lack of Security
Since the arrival of the nascent crypto exchanges in 2011/12, vulnerability to hacking has led to thefts in excess of 4 billion USD-equivalent of digital assets. Moreover, existing exchanges lack many of the customer protections taken for granted when transacting on traditional market platforms, in particular robust risk management capabilities with regard to custody of assets on the platform.
Unlike traditional markets, where the order matching and price discovery functions are quite separate to custody and settlement of transactions, the current landscape in the crypto universe is such that all of these functions are generally performed by one central party – the crypto exchange itself. This creates an obvious dilemma for any large institutional participant, namely that they are exposed not just to market and liquidity risks arising from their trading activities, but also to counterparty risks associated with the custody and settlement of their assets. Moreover, these counterparty risks are, for the most part, extremely difficult to price and practically impossible to hedge, a problem made even worse by the knowledge that many of these liquidity venues are private, unregulated corporations with opaque, if not invisible balance sheets, rendering the recovery of lost or misappropriated assets all but impossible.
Lack of Reporting and Compliance
Hedge funds and proprietary trading houses that transact in digital assets are no different to other fund managers in their need for strong compliance and reporting procedures. In order to access the necessary liquidity to trade in large volumes, these participants must transact across a large number of independent venues, with the aggregate information required for fund-wide reporting becoming extremely difficult to compile. Since there is no existing third party off-the-shelf compliance, risk management and reporting solution, the vast majority of these fund managers and proprietary traders have, to this point, resorted to maintaining spreadsheets to track various position, risk and portfolio metrics.
In addition to this, many institutions are mandated to keep extensive audit records, including for example, granular data on the levels of individual transactions, triggers to pre-trade risk and exposure limits and capture of all order amendments. Furthermore, funds and Investment advisors must provide regular reports to their LPs regarding exposures, liquidity risk, portfolio returns, value at risk, summary of performance and future outlook. These outputs are simply not available on most existing crypto exchanges and there is as yet, no existing solution in the market to alleviate this burden.
In combination, these barriers have slowed the growth of crypto investing and are a likely cause for institutional players and sophisticated traders to remain on the sidelines. Our industry requires a solution. By providing professional-grade trade order, execution, compliance and risk management features through a single, high-performance, user-friendly interface, we believe the Caspian platform addresses all of the major barriers currently facing crypto investors. In the following series, we will take you through the key features of the Caspian platform and how they could help end the challenges most sophisticated investors face when trading crypto.
We’d also love to hear what frustrations you’ve encountered when trading crypto. Please leave a comment or chat us up on Telegram. If you want to learn more about our platform, please visit us at caspian.tech.
By David Wills, COO and Co-Founder of Caspian
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