As the institutional adoption of digital assets grows, demand increases for classical financial services on the cryptocurrency market. After months of speculation, institutional investors have finally entered the crypto industry, becoming the largest buyers on the over-the-counter market.
According to Bloomberg, investors of this category bought cryptocurrencies with an average transaction of $100,000 through private sales.
Confused by the high volatility of the crypto market, institutional investors face entirely different challenges on crypto markets than retail investors. Bitcoin (BTC) has seen a spike in price of up to 40%, over the course of the last month, along with a considerable increase in volatility, attaining a record-breaking rate of 5.4%.
Structured deposits enter the crypto space
Though volatility is often considered a deal breaker, private and institutional investors are, on the contrary, expressing growing interest towards bitcoin as a valuable addition to their portfolios. With demand for assets comes demand for instruments required for hedging possible risks associated with their price-making mechanics.
The Chicago Mercantile Exchange (CME) was the first to cater to such demand from investors by offering futures settled in bitcoin, ethereum (ETH), or United States dollars as the derivatives on bitcoin, followed shortly by Bakkt.
Both unregulated and regulated platforms have trailed suit developing products for leveraging risk, providing risk management, shorting, and other instruments.
Unlike options and custody solutions that appeared on the crypto market back in 2018, with such large players as Coinbase and Fidelity having launched a custodian service for institutional investors, structured deposits are a newfangled introduction for the crypto industry.
On classical financial markets, structured deposits are not a novelty as they are quite popular among traditional traders and investors. They offer protection against risks and attractive growth potential – their hallmark feature and the main difference setting them apart from direct investment strategies.
Many banks offer their clients structured products with 100% capital protection. The high degree of security of structured financial instruments is made possible due to their structure, as they consist of 80% to 90% of the most reliable securities and only 10% to 20% of highly profitable but risky assets.
Companies offering such services are just starting to appear on the cryptocurrency market.
An attractive investment strategy?
In March, Gekkoin launched a structured deposit product for European residents, offering them a ready-made investment portfolio based on cryptocurrencies and classical bonds.
Gekkoin’s structured deposits allow investors to use digital assets, such as BTC, ETH, and monero (XMR), to increase the deposit rate. At the same time, it provides capital insurance of up to 100% in the event of negative market dynamics by employing securities and bonds in the portfolio.
Depending on the chosen strategy, the product offers a guaranteed income on crypto deposits from 16% to 50% of the growth in the value of the asset if the market grows.
The safe investment plan provides 2% to 4% per annum from investments if the price of the cryptocurrency falls or remains the same.
In practice, it works as follows: an investment of $1,000 in bitcoin has its value doubled from $50,000 to $100,000. In this case, depending on the selected plan, the investor will receive a profit of $160 to $500. If the price of bitcoin falls and approaches the minimum of 2018-2019, or drops by ten times, the holder will earn from $20 to $40.
Such a strategy may look attractive for those who want to receive profitability rates higher than those offered by traditional financial instruments, but at the same time want to exclude or limit the possibility of losing their investments.
Others, who consider the risk of losing potential profits in case of an increase in the value of the cryptocurrency more important than the risk of losing their capital, might want to look at other strategies though.
Capitalizing on both bullish and bearish markets
Just as stocks and bonds are important components of a diversified investment portfolio, structured deposits are becoming increasingly important for achieving a specific investment goal when dealing with cryptocurrencies.
Structured deposits usually give investors the opportunity to capitalize on both bullish and bearish markets, hedge current positions, or access previously unattainable assets. Investor appetite for cryptocurrencies continues to grow and demand for structured crypto products is likely to follow suit.
Crypto companies such as ACDX, ShortLyci from Lykke, and INVAO also offer their users structured products for digital assets. However, many of them, like Lykke and Pokket, provide portfolios based on crypto only, while the combination of digital assets and classical tools is still unique for the market.
According to INVAO, those willing to invest in cryptocurrencies face a number of problems. The main of them is that investors must register directly with exchanges and custodian providers. Since exchanges are usually located in different countries, and therefore subject to different laws and Know-Your-Customer (KYC) requirements, the registration process can take several months.
To avoid this problem, investors have two options:
- They can either work with a broker who trades and holds assets in custody,
- Or use structured products that already meet all relevant regulatory requirements.
Structured products and deposits can also be referred to as guaranteed capital or guaranteed income bonds, or simply guaranteed exchange-traded bonds.
The multitude of names emerging as a consequence of the mass of options for structured products on the classical financial market probably foreshadows the popularity of structured products on the crypto market, as has already happened with options and futures.
The development of industry regulation is likely to encourage the continued adoption of cryptocurrencies and the growth of the industry as a whole in 2021.
The latest news sheds clear light on the inclination of the largest banks to launch structured products with cryptocurrencies. The inclusion of digital currencies in their list of assets for investment may allow financial institutions to offer their clients more profitable and attractive alternatives for profit making than bank deposits.