How to use a crypto asset prime broker

For many hedge funds managers, their choice of prime broker has the potential to be a deciding factor in their success. In many cases, this may also be true to the extent to which hedge funds actually make use of the services provided by their prime brokers.

As the popularity of cryptocurrency grows and investors continue to make considerable returns on their capital, institutional investors have been eyeing the crypto market for some time.

Given that the market is still relatively young and the risk of volatility is considerably high, many investors have been put off by the lack of infrastructure to support large-scale crypto investment strategies. A big part of this is the absence of major prime brokers that specialise in digital assets and virtual currency.

As a result of such pent-up demand, more prime brokers specialising in crypto-based services are emerging. But how are they different from traditional prime brokers?

What is a crypto prime broker?

Crypto prime brokers ease the processes of trading cryptocurrency assets – often a necessity with crypto assets compared to traditional markets.

Since the world of crypto is relatively disjointed – lacking the sophisticated infrastructure that most investors are used to with mainstream markets – buying and selling assets across multiple exchanges is incredibly difficult. One of the most valuable services a crypto prime broker offers is simplifying this process for institutional investors.

As crypto prime brokers become increasingly sophisticated and their client base grows, so too are the services they offer. The majority now aim to streamline processes and help funds optimise their strategy to increase the likelihood of making profits.

While there’s no question that a hedge fund would need the services of a prime broker to have any real chance of success in the crypto market, the varying degrees of that success may depend on how well it uses the additional services on offer.

Making the most of a crypto prime broker

Aside from the basics, some of the most reputable crypto prime brokers are updating their services with the aim being to provide their clients with the best chances of turning a profit. Below, we discuss some of the services on offer and how institutional investors can make the most of them.

Trusted custodians

Assigning a prime broker as the custodian of its assets requires a lot of trust on the part of hedge funds and is as important to their clients, if not more so. This level of trust has for a long time been missing from the world of crypto as it’s only recently that reputable brokers have started to emerge.

Any prime broker worth employing will prioritise the safety of a hedge fund’s assets, operational transparency (so one can trust that their assets are safe) and regulatory clarity. Above all else, this should provide fund managers (and their clients) with peace of mind in knowing their assets are secure.

Regulatory advice

As the laws and regulations around trading cryptocurrencies are still in their infancy and are likely to change over time, investors will do well to ensure that they comply with all the legal obligations expected of them.

One of the services offered by some prime brokers is regulatory advice, which can be beneficial as support for hedge funds.

Market data

Many prime brokers will offer market data and analytics to help hedge funds and to spot trends across futures, options, decentralised finance (DeFi) and other key market themes.

Investors should make the most of this data, as it may prove to be a significant factor in the success of a particular strategy or trade. On the other hand, investors that don’t do their due diligence in analysing the markets may suffer considerable losses – especially when dealing with crypto-assets and digital currency.

API capabilities

As many prime brokers will offer to provide their clients with an API-enabled trading platform, investors gain the ability to essentially ‘plug in’ additional tools to the platform to help optimise their processes.

This could include anything from world and financial news feeds from top-tier media outlets, real-time and historical market data and the development of programmatic trading bots and algorithms, which can automatically place trades on behalf of investors.

Traders can customise the trading platform offered by their prime broker to incorporate all the tools they need to achieve the best results.

To conclude, there are several services that crypto prime brokers offer that hedge funds can use to increase their chances of success. Although the services a fund uses may depend on their strategy, they should always aim to make the most of the advanced tools and services at their disposal to gain a competitive edge and have the best chances of success.