Institutional Cryptocurrency Trading – Gaps and Opportunities

The cryptocurrency market is in the news for the past few years as they are being viewed as “the pioneer” for decentralized financial networks. Their market is gaining huge traction and is currently valued at around 1.6 Trillion USD. (0.44% of the estimated USD 360 Trillion global wealth).

Cryptocurrencies have proven use cases & applications that are driving people to accept them as a mode of payment. They have now started to acquire the properties of a fiat currency (namely scarcity, divisibility, utility, transportability, durability, and counterfeit ability). It is also the faith that individuals and governments have in them that pitches them as the currency of the future, attracting not just individual investors but also large fund houses.

Current Scenario

Institutions and Hedge funds have been active in the traditional markets due to various reasons. But it was technology that drove its adoption to the next level. The FIX protocol brought trendsetting developments along with it in the 90s.

The cryptocurrency market is at such an inflection point now. Apart from being discussed for technological curiosity, many investors have stepped forward to trade and invest in this ecosystem. Scaling the business for successful fund managers has been difficult since there are very few platforms that help them to focus on the management of funds.

Given the attention, cryptocurrencies have garnered so far, They have given birth to a new set of asset classes and instruments. But largely all of them are scattered across different decentralized exchanges. This means there are numerous challenges for institutional investors to invest and trade in cryptos. The challenges start with:

  1. Diverse locations of exchanges making it a truly global market
  2. 24/7 * 365 based trading cycles.
  3. Each exchange having its own APIs and connection technologies making communication harder.
  4. No standard data reporting procedure and compliance tools by exchanges.
  5. Security and theft of trader’s API keys is a major issue.
  6. Credibility and Liquidity are of concern making it hard to mitigate risk
  7. Audit and tax compliance is an issue for the trader.
  8. Alerts and Algorithmic trading is hard to scale up

Institutions have recently started to add cryptos to their asset portfolio. For example, the total assets under management stand around US 31 Billion USD. Funds have generally seen a 6X growth in 2020.

Solutions for trading Crypto Professionally

There is a definite need for professional systems with the following features to keep the entire trading journey automated, reportable and trustworthy.

1. Order and Execution Management System

Trading starts with orders being placed in the portal. The traders start placing orders once a “go ahead” is signaled by the investors. The OEMs handling system streamlines the entire trading process. Since interaction between multiple exchanges should happen simultaneously, we need a stable system that places an order and executes it seamlessly. Having a single cloud-based platform that interacts with all the exchanges, happens in this segment.

2. Portfolio Management System

Once orders are placed, the PMS constantly tracks the investment portfolio in various factors to determine its performance. There are multiple indicators that signal the growth of the fund. Hence by keeping a tab on all of them, The PMS gives key insights on asset performance and trading actions.

3. Risk Management System

The crypto market is not as stable as the traditional ones as it’s relatively new. Hence market volatility is bound to be present. Given these circumstances, the RMS gives us the ability to take risks and mitigate them in case of an unforeseen event. Having an automated process for the same is seen as a great asset when millions of dollars are planned to be invested. By offsetting the risks, minimizing losses, and maximizing profits. The RMS helps to mitigate impending events in a professional manner.

4. Compliance and Reporting Management

The biggest challenge in the crypto market is to decode data meaningfully. Often, we see data that is decentralized and nonstandard, because each exchange has its own parameters and format of reporting. This only makes analytics more complex. Thus, having a dedicated reporting engine is vital to understand and interpret trade performances. The Compliance and Reporting engine also takes care of regulatory requirements. As sovereign governments come up with regulations, this engine takes care of handling it. It ensures regulatory compliance to be more transparent, efficient, and trustworthy.

5. Alerts Engine

The alerts engine works in synergy with PMS and RMS. Having an alerts engine is vital to execute strategies at the right time. Without this component, it becomes hard to do trading at scale, as various pockets of assets would be trading at various exchanges at various timeframes. From a UX perspective, it enriches the trading experience enabling the execution of the strategies at the right time.

6. Automated Trading

Apart from regular algorithms, a provision to customize and feed algorithms to the system makes it more user-friendly. Most traders follow a mix of strategies and understand the market in different ways. Hence the option to customize in addition to a set of strategies should be in place.  An institutional investor would carry more checks which have been designed based on their past experiences. Algorithms can include traditional strategies like Moving Averages, Relative Strength Indicators, Bollinger Bands as well.

7. Fundamental Analysis panel

Apart from decoding the price mechanism and investor sentiment, fundamental analysis involves understanding the crypto deeply. This involves many subjective parameters that help us decode the real-world growth potential of the cryptocurrency. Some of the factors that the panel can host are

  • Understanding the “Tokenomics” and reporting its parameters
  • Reporting network activity, Active addresses, balance addresses, the ratio of active addresses to balance addresses.
  • Market capitalisation range
  • The volume of coins traded per day in each exchange
  • The coin’s listing, reputation, and ranking across exchanges
  • The average time taken per transaction and it’s performance parameters
  • Distribution of the token/ coin in the network and the extent of actual decentralization the coin has achieved
  • The extent of code updates and repositories on GitHub, The community interaction, and update frequency from the team. Report on Bugs and issue tickets are also crucial.
  • Quality of white paper and its depth. Clean updates in the white paper compared to a clanky writeup. Emphasis on common consensus and decentralization must be showcased. The technology’s interoperability, scalability, and use cases are a parameter to consider.
  • A parameter that reports on team quality, due diligence, background check, and their mission. The ratio of developers to Managers and the technology-driven team will speak more about the performance of the coin.

Drop a comment or write us an email at info@pirimidtech.com for any feedback about this article. Do check out our portfolio in building Robo advisory, Large Scale Trading Systems, Algo Trading, Stock Sentiments, Price Trends Forecasting, Backtesting frameworks, Credit Model, Open Banking, etc. on our website. Connect with us to discover how our Fintech expertise can help you build cutting-edge solutions powered by AI/ML.

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