There is not a single crypto custodian that scores highly on every dimension, and custodians exhibit different strengths. The right custodian depends very much on the needs of the client.

An Insider Insight with John Gu, CEO of AlphaLab Capital Group

The OGs (Example: BitGo)

This group consists of qualified custodians whose clients are also highly regulated institutions — e.g., Fidelity, Calpers. Their service offering reflects the conservative trading needs of their client base, and while they may be relatively expensive, they are the ideal choice if your primary goal is to minimize risk.

New Guard (Examples: Fireblocks, Copper)

The “second wave” of custodians has established a dominant position in an adjacent market to the OGs and differentiates itself by offering a broader range of services. As such, they are not primarily focused on minimizing risk. They attract clients — e.g., mid-sized hedge funds — with more complex trading requirements, for whom the trade-off between regulatory certainty and enhanced functionality makes sense.

Challengers/Upstarts/Wildcards (Example: Atato)

This group often originates from non-Western markets. They compete with the New Guard, aiming to offer a similar or improved breadth of service — e.g., Atato’s “Bring Your Own Chain” offering supports all assets, past, present, and future — with enhanced usability and a lower price. They represent an attractive choice for smaller funds or startups with complex needs, higher price sensitivity and a willingness to take a chance on a new player.

Specialists (Example: Finoa)

For investors who require deep expertise in a specific area — e.g., staking services — it may make sense to use a specialist custodian in lieu of or in addition to one of the generalists. In the future, one would expect the specialists to raise their performance across the other axes or for the generalists to raise their game to accommodate specialist needs. For now, a multi-custodian approach may be the best bet.

The above represents the current state of the market and not the end or ideal state. That said, we do not believe that winner-takes-all effects will prevail, leaving one or two dominant players as the main or only viable choice. The crypto investor market is uneven and calls for a range of players to fulfill various use cases. Knowing what you need is therefore key, and (for now at least) performing careful due diligence is paramount.

This article is an extract from the 70+ page Institutional Demand for Cryptocurrencies Survey co-published by the Crypto Research Report and Cointelegraph Consulting, written by multiple authors and supported by Flow Trader, sFox, Zeltner & Co., xGo, veve, LCX, Finoa, Lisk, Shyft, Bequant, Phemex, GMI.

As cryptocurrency continues to grow in popularity, larger organizations such as hedge funds and decentralized autonomous organizations (DAOs) have to deal with the reality of growing regulation, risk from hackers, and responsibility to their clients. One of the most important factors for these organizations is choosing the right custodian for their assets. However, with the sheer number of options available and the secrecy of the industry, finding the right custodian can be a daunting task.

While self-custody (“your keys = your crypto”) remains the ideal for cryptocurrency purists, larger organizations, such as hedge funds and Web3-native entities, such as decentralized autonomous organizations (DAOs) have to grapple with the reality of growing regulation (by governments), risk (from hackers) and responsibility (to their clients).

The custody landscape, like everything else, is an emerging field with a range of heterogeneous solutions. In addition to the sheer number of options available, the expected secrecy of the industry makes it difficult to find details unless you are able to ask very specific questions and know the range of the offerings at hand.

We’ve narrowed down the important factors for the potential custody user.

DeFi Connectivity

The sprawling world of DeFi, with its decentralized lenders, trading platforms and native tokens, such as stablecoins, is continuously evolving. The ability to connect and trade seamlessly within and between these protocols is vital for clients, for whom DeFi represents a core part of their strategy.

Staking/Yield Services

Putting your money to work by staking (on a validator node) or earning yield (via DeFi protocols) is an increasingly vital part of crypto investing. It also requires time and effort that could be spent elsewhere, and the ability of a custodian to take on this role represents a distinct advantage for the professional investor.

Supported Assets

History (especially recent history) has shown that there are no “safe” coins, so it is necessary to build a diversified portfolio, not only across tokens but also across chains. Ideally, a custodian should be able to support any asset you bring, but in reality, the ability to add new coins can be constrained in the case of older technology.

Pricing Competitiveness

The traditional pricing structure is to charge based on asset value (assets under custody) and the number of transactions. New providers are increasingly innovating on pricing models, including offering fixed fee subscriptions, tiered by service level, which can mean significant savings in comparison to asset or activitybased fees (which are not capped). Thus, pricing structure (basis points or $) is often more important than price level (25 bps vs. 35 bps).

Security

The most basic and most important service of a custodian is to keep assets safe. There are multiple methods that custodians use to keep your keys secure (MPC, HSM) and various ways in which they can demonstrate the efficacy of these systems (such as audits). Systems ultimately demonstrate their security when they manage to scale without being successfully hacked or experiencing a major code failure. But ultimately, a history of no major hacks or code failures is the truest testament to a system’s security.

Insurance

Since no security system is invulnerable and human beings are fallible, insurance is the last line of defense and should, in theory, provide users with ultimate peace of mind. The reality of crypto custody insurance is often patchy, so even if a custodian claims to be insured, it is important to pay attention to the level and terms of coverage, ideally with an expert trained to read the fine print.

Choosing the right custodian for cryptocurrency assets is crucial for larger organizations dealing with growing regulation, risk, and responsibility. Factors such as DeFi connectivity, staking/yield services, supported assets, pricing competitiveness, security, and insurance are important considerations when choosing a custodian. By carefully considering these factors, organizations can ensure that their cryptocurrency assets are safe and secure.

This article is an extract from the 70+ page Institutional Demand for Cryptocurrencies Survey co-published by the Crypto Research Report and Cointelegraph Consulting, written by multiple authors and supported by Flow Trader, sFox, Zeltner & Co., xGo, veve, LCX, Finoa, Lisk, Shyft, Bequant, Phemex, GMI.

Market makers have played a vital role in financial markets, and their importance has only increased in the cryptocurrency space. With growing demand for Bitcoin and Ethereum trackers, market makers have been providing liquidity and reducing spreads, volatility, and enabling fair price discovery. Additionally, they can support the growth of the ecosystem by adding value beyond market making.

Insider Insight with Michael Lie, Head of Digital Asset Trading at Flow Traders

Back in 2017, we saw a growing demand in Bitcoin and Ethereum trackers. As global liquidity provider specialized in ETPs, it was a natural move for us to provide liquidity in products that were tracking cryptocurrencies. We soon started making markets in cryptocurrency spot, futures and ETPs. We were able to leverage our technology stack and trading experience to start trading this new asset class. As the market developed, we started trading options, we became active on decentralized finance protocols, and we also created an OTC business.

What is a role of a market maker in crypto?

Market makers have always been very important for financial markets. It reduces spreads, it reduces volatility and also leads to fair price discovery of the quoted products. Even more so for crypto, where the ability to invest in a project at a fair price can play an important role for the success of a project. Especially for projects where a well-diversified and decentralized distribution of tokens is key, a good market maker will have a big impact.

As we started market making cryptocurrencies, it became apparent that we can add value beyond market making. We support ventures and the growth of the ecosystem with our experience in traditional finance and our capital, which is why we launched our venture fund Flow Traders Capital this year.

How do you view institutional adoption?

For institutional adoption of cryptocurrencies, the two most important factors are the market infrastructure and the state of regulation. Over the last years, a lot has improved on the infrastructure, such as the exchanges where you can trade cryptocurrencies and the custody solutions that are being used. As for the regulation, it’s not fully there yet, but implementation of regulations like MiCA will enable institutions to start adopting cryptocurrencies.

An example of a regulated product that has enabled institutional adaption of cryptocurrencies are crypto ETPs. These are products that are traded on exchanges and track the price of cryptocurrencies. At the same time, these products are regulated and enable institution to gain cryptocurrency exposure, without having to deal with on which exchange they are going to buy the cryptocurrencies and what custody solution they are going to use.

Institutional adoption of cryptocurrencies depends on market infrastructure and regulation. Although much has improved in infrastructure, such as exchanges and custody solutions, regulation is still evolving. The implementation of regulations like MiCA is expected to enable institutions to start adopting cryptocurrencies. Regulated products like crypto ETPs have already enabled institutional adoption by allowing them to gain cryptocurrency exposure without dealing with exchanges and custody solutions. The role of market makers remains crucial in the success of projects with a well-diversified and decentralized distribution of tokens.

This article is an extract from the 70+ page Institutional Demand for Cryptocurrencies Survey co-published by the Crypto Research Report and Cointelegraph Consulting, written by multiple authors and supported by Flow Trader, sFox, Zeltner & Co., xGo, veve, LCX, Finoa, Lisk, Shyft, Bequant, Phemex, GMI.

Options are an important tool for investors to manage volatility risks, and the cryptocurrency market is no exception. While the volume of options traded is still lower compared to futures, there is still significant potential for growth, as shown by the ongoing downtrend in at-the-money implied volatility for both Bitcoin and Ether. This could indicate that the market is maturing and attracting more institutional participation.

Options are one of the most important instruments for investors to hedge against unexpected volatility. Just as with futures, there are some options on digital assets that are issued by traditional institutions and others by cryptocurrency exchanges. Of those, Deribit is by far the most important. More than 95% of all cryptocurrency option trading activity happens on this exchange. The monthly volume of options transactions was between $10 billion and $20 billion for Bitcoin and between $5 billion and $15 billion for Ether-denominated options in 2022.

As you can see, the volume of options traded is about two orders of magnitude lower than that of futures. In traditional financial markets, the ratio of futures volume to option svolume is around 3.9.29 This indicates that derivatives options have a long way to go and represent the vast potential for growth.

An interesting picture emerges if we look at at-themoney implied volatility. This is a representation of future volatility that traders expect. We can see a slow but steady downtrend in ATM implied volatility for both Bitcoin and Ether. A notable exception is the peak in May 2022 following the demise of LUNA.

This ongoing downtrend is the hallmark of maturing markets and better hedging, which could be indicative of more institutional participation.

Bitcoin ATM Implied Volatility

If we reconsider the chart overlaying Form 13F filings with Bitcoin’s price, we can see that institutional interest is driven by price. When Bitcoin outperforms all other asset classes, even institutions are willing to look past the regulatory uncertainty and volatility and want to get in. But digital asset prices have been mostly sideways or negative YoY.

The cryptocurrency options market has significant potential for growth, as shown by the increasing institutional interest and ongoing downtrend in implied volatility. While the volume of options traded is still lower compared to futures, this could change as the market continues to mature and attract more investors. As such, it will be interesting to see how this market develops in the coming years and what opportunities it presents for investors looking to manage their risks.

This article is an extract from the 70+ page Institutional Demand for Cryptocurrencies Survey co-published by the Crypto Research Report and Cointelegraph Consulting, written by multiple authors and supported by Flow Trader, sFox, Zeltner & Co., xGo, veve, LCX, Finoa, Lisk, Shyft, Bequant, Phemex, GMI.

Digital asset futures have become increasingly popular among professional traders due to their liquidity and market sentiment indicators. Perpetual swaps, which are never settled, dominate the digital asset futures market. Open interest, a measure of active futures positions, has increased significantly over the past year, particularly during bullish periods.

Digital asset futures are almost exclusively perpetual swaps (mostly called perpetuals or just “perps”), which means they are never settled.

Open interest is a great measure of future liquidity. Open interest measures the value of active futures positions held. It increases when more contracts are opened than closed on a specific day. Looking at the development of open interest shows peaks during bull markets in the spring and winter of 2021. The overall level has increased by about 30% in 2022 compared to last year and by more than five times from 2021 to the year before.

Open Interest of Bitcoin Futures

Comparing the liquidity of futures to the spot market reveals why derivatives are so attractive to professional traders. Spot markets offer a fifth to an eighth of the liquidity of derivatives markets for Bitcoin and a quarter to a fifth for Ether.

The volume of traded Bitcoin futures is between $1.5 trillion–$2 trillion worth in any given month, about slightly less than half of that for Ether. Compared to the traditional futures market, where a multiple of this is traded every day, it is a small change.

Bitcoin Spot to Futures Volume

Another important metric to consider is funding rates. Perpetual funding rates indicate the market sentiment. Put simply, positive funding rates mean long traders pay short traders so that the price of the perpetual aligns with the spot price. If funding rates are consistently positive, markets are bullish. Consistently negative funding rates are found in bear markets. Both Bitcoin and Ether funding rates have been hovering around 0%, which aligns perfectly with the slowdown in institutional interest from Form 13F filings and inflows into digital asset funds.

As the digital asset market continues to evolve, perpetual futures are becoming an important tool for professional traders seeking liquidity and market sentiment indicators. While Bitcoin and Ether dominate the digital asset futures market, other cryptocurrencies such as Ethereum Classic, SOL, XRP, Tether, and BNB are also gaining traction. As the industry continues to grow, it will be interesting to see how digital asset futures evolve and what new metrics and indicators traders will use to inform their strategies.

This article is an extract from the 70+ page Institutional Demand for Cryptocurrencies Survey co-published by the Crypto Research Report and Cointelegraph Consulting, written by multiple authors and supported by Flow Trader, sFox, Zeltner & Co., xGo, veve, LCX, Finoa, Lisk, Shyft, Bequant, Phemex, GMI.

Institutional investors have various options to gain exposure to the cryptocurrency market, including investing in blockchain companies through traditional routes such as seed, VC, growth stage private equity, or mergers and acquisitions. This approach offers a better understanding of legal, accounting, and tax implications in comparison to direct investments in cryptocurrencies.

Apart from directly purchasing digital assets, institutional investors can gain exposure to this market by investing in blockchain companies via the traditional routes of seed, VC, growth state private equity or mergers and acquisitions. The advantage of investing in a blockchain company is that the legal, accounting and tax implications are well understood in comparison to the mirky gray area associated with directly purchasing cryptocurrencies.

Top Banks, Asset Managers and Payment Companies Investing in Crypto and Blockchain Companies

We can see that many major banks have invested in either blockchain infrastructure companies, such as Fireblocks, cryptocurrency exchanges, such as Gemini, or analytics companies, such as Amberdata. The trend is clear in what types of companies are being invested in — compliance, custodial, and infrastructure. The trend is clear in what types of companies are being invested in – compliance, custodial, and infrastructure.

Top Public Companies Investing in Crypto and Blockchain Companies

In addition to banks, global technology giants are also investing in blockchain and crypto companies. The most active investors include household names such as Samsung, PayPal and Google’s parent company, Alphabet. Apart from blockchain developer companies, such as Layer Zero, Immutable and Talos, digital asset custodians, such as Fireblocks or Anchorage, were popular choices, as were GameFi powerhouses like The Sandbox and Dank Bank.

Investing in blockchain companies offers institutional investors a well-understood legal, accounting, and tax framework. This approach has attracted major banks and technology giants who have invested in compliance, custodial, and infrastructure companies. As the crypto market continues to evolve, it is likely that more traditional investors will look towards this route to gain exposure to the market.

This article is an extract from the 70+ page Institutional Demand for Cryptocurrencies Survey co-published by the Crypto Research Report and Cointelegraph Consulting, written by multiple authors and supported by Flow Trader, sFox, Zeltner & Co., xGo, veve, LCX, Finoa, Lisk, Shyft, Bequant, Phemex, GMI.

Distributed ledger technology has gained significant attention in recent years, and professional inventors are seeking ways to gain exposure to it. This article focuses on the four main ways that investors are gaining exposure to digital assets – directly holding cryptocurrencies, buying crypto funds, mergers and acquisitions (M&As), and derivatives. It looks at the survey results of the preferred ways that investors are gaining exposure to digital assets and analyzes the role of active and passive management strategies in this area.

This article focuses on the different ways that professional inventors are gaining exposure to distributed ledger technology. The four key ways include directly holding cryptocurrencies, buying crypto funds, mergers and acquisitions (M&As) and derivatives.

What would be your company’s ideal way to gain exposure to crypto assets?

There are many regulated investment products that give investors exposure to digital assets, including long-only single-asset or index products, derivative products, bank accounts for proprietary desk trading and much more. The survey results show that a slim majority of investors (55%) prefer to hold cryptocurrencies directly. Interestingly, professional investors prefer to buy a regulated alternative investment fund before buying structured products or trading futures. Active strategies beat out passive strategies by a narrow margin.

Do you prefer crypto investment products with passive or active management?

To further explore this area of crypto investment products we asked Dr. Alexander Thoma, the Head of Digital Assets at PostFinance about his position on digital assets:

“Digital Assets are one of our strategic focus fields because we believe in the fundamental technology behind it and see a potential for many future use cases. Cryptocurrencies, which we subsume under digital assets, are currently the one digital asset with the highest market readiness. For us, the growing institutionalization over the last 18–24 months has helped to grow and mature this market in a way that cryptocurrencies are the fifth asset class and are here to stay.

On the other hand, we register an increasing demand from our customers regarding services and products centered around digital assets and in particular cryptocurrencies. Our customers wish to handle their cryptocurrencies business where they handle the rest of their financial business: with us as their main house bank. We believe that a substantial part of exchange services derive from necessity, as most traditional banks still don’t offer crypto services. We want to change that. Hence, it is our job to establish a safe and easy way for our customers to access this market.”

The growing institutionalization of cryptocurrencies over the last 18-24 months has helped to mature this market, and it has become the fifth asset class that is here to stay. With the increasing demand from customers for services and products centered around digital assets, the article highlights the need for a safe and easy way for customers to access this market. The survey results show that a majority of investors prefer to hold cryptocurrencies directly and opt for regulated alternative investment funds over structured products or futures trading.

This article is an extract from the 70+ page Institutional Demand for Cryptocurrencies Survey co-published by the Crypto Research Report and Cointelegraph Consulting, written by multiple authors and supported by Flow Trader, sFox, Zeltner & Co., xGo, veve, LCX, Finoa, Lisk, Shyft, Bequant, Phemex, GMI.