Driving Greater Institutional Involvement in Crypto Markets
Disclaimer: Your capital is at risk. This is not investment advice.
Three Ways On-Chain Data Supports Adoption.
I had the pleasure of speaking on a panel at DAS:London last week, discussing the role that prime brokerages play in increasing institutional involvement in Crypto-assets. The room was overflowing with 500+ representatives from financial institutions, asset managers and service providers all working towards growing the ecosystem.
The outcome of the panel was clear. Prime brokerages are central to supporting the multitude of challenges investors face when entering the crypto markets - trade execution, exchanges, market makers, custody and lending to name a few. While the rise of the prime brokerage is bullish for the industry, accessibility alone will not drive adoption.
If prime brokerages grease the wheels of institutional investment, research and high-quality market data are the engine that drive new entrants into the space.
Crypto is the first digitally native asset class and a transformative financial innovation. Crypto-assets are accounting units on global, distributed, public settlement networks, or ledgers.
The public nature of these ledgers means that data companies such as ByteTree can monitor the volume and value of asset transfers, account balances and an array of network fundamentals in real-time.
On-chain data is critical to providing legitimacy to the industry in the following three ways:
1. Research
In 2019 the network transacted an average of $1.8Bn per day which is x20 the volume five years earlier. The network has in excess of 20M different entities, an average of 300k daily transactions and collects $200k in daily fees. Transactions come in all shapes and sizes, from as little as $0.001 to over $1Bn. While the core activity on the Bitcoin Network takes place between $10 to $100, we still see over 200 transactions over $1M each day – around 0.1% of all payments.
On-chain data highlights the type of activities that underpin crypto-asset networks.
Data from blockchain networks provide information on the type of activity that underpins the value of crypto-assets. It is a critical part of bringing greater legitimacy to the asset class.
2. Trading and Investment strategies
Asset allocation is driven by strategies, strategies need data. With a wealth of information available on market participants and their behaviours, on-chain data is a honey pot for the alpha seeking investor. This can be split into long term investing as well as proprietary trading strategies.
Longer-term investment strategies have been well documented over the last few years. They focus on three areas; network demand, active supply and active addresses. The ByteTree terminal focuses mostly on network demand metrics at this time.
The ByteTree Terminal can be used to identify the relationship between network demand and longer-term price moves.
Shorter-term trading strategies are enabled by the plethora of data available on blockchain networks. One such strategy is anticipating a drop-in price that comes about from a large transaction being sent to an exchange for liquidation. This is possible because of the low-liquidity across a number of exchanges, especially in the alt-coin markets.
3. Regulatory Compliance
In order for the industry to thrive, we need to be at least as compliant as other value transmitting services.
On-chain data is increasingly used for AML/KYC procedures that require service providers to validate the source of funds, conduct CFTC checks and notify tax authorities of user balances. The IRS is already using on-chain data to target US investors, while HMRC put out an RFQ in January of this year to begin doing the same.
While such surveillance is unpopular among Cypherpunks, services like these benefit the development of the space as a whole.
Using on-chain data enables regulators and service providers to flag entities associated with potentially nefarious transactions. Using a heuristics-based approach, wallets can be labelled and grouped as different entities. This can include labelling coin mixers and dark pools that are typically used for ‘cleaning’ the history of the coin. Once a coin has been flagged as having been ‘cleaned’, it may then be sent to an exchange or OTC broker to be liquidated. At this point, it is the role of the service provider to conduct an enhanced, ‘off-chain’ due diligence as to the source of funds, since the on-chain history has been tampered with.
Summary
Access to quality data feeds is essential for the market to mature. While price and exchange data form the backbone of financial products such as indices, ETPs and CFDs, on-chain data provides a plethora of additional benefits that will drive greater institutional involvement in the crypto markets.
After all, that’s what we are waiting for. Right?
